An uncertain global outlook: Assessing the global economic impact of Covid-19
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24 March 2020
Simon Rubinsohn
Chief Economist, RICS
Key points:
- Global economic activity sees sharp drop in activity, although consensus view is for some recovery in Q3
- Global policymakers are taking unprecedented action to mitigate economic impact
- We will see impact on activity in construction and real estate sectors before we see impact on asset prices, but flight to quality assets likely
- In the long-term, the built environment will adapt to changing societal need; logistics sites should grow in demand, while residential use likely for space vacated by businesses changing operating models
It goes without saying that the nature of shock now hitting the global economy is very different from the traditional inventory or investment-led downturn or, for that matter, a slump linked to a financial crisis. In place of a recession building over a period of time, we are now seeing an immediate and very sharp drop in the level of economic activity. Indeed, the seizing up of large parts of the world at the same time is pretty much without precedent. This time, truly, it is different.
Against this backdrop, it is not surprising that macro numbers for this year are being scaled back in a dramatic fashion. And while forecasts by their nature tend to be ephemeral, the margin of error around these revised projections is inevitably greater than normal given that traditional models used to build out these expectations are of questionable value in the current set of circumstances.
That said, for the time being the consensus view is still for a very sharp but relatively short recession. Indeed, most forecasters currently anticipate some form of recovery beginning in the third quarter of the year. That assumption, fairly obviously, will depend on whether the spread of the virus has been brought under control.
Global policymakers take unprecedented action
What is not in doubt is the sheer scale of the policy response that has been sanctioned in an attempt to mitigate the plunge into recessionary conditions.
In crude terms, the global weighted average monetary policy rate is now well below post-global financial crisis (GFC) lows. Alongside this, central banks have introduced an array of complementary measures; these include another $700bn of quantitative easing from the US Federal Reserve, a €750 billion Pandemic Emergency Purchase Programme (PEPP) from the ECB, the purchase of ETFs and J-REITs, commercial paper and corporate bonds by the Bank of Japan and the upsizing of re-lending facilities to commercial banks by the People’s Bank of China.
Meanwhile, policymakers have in recent days announced huge fiscal programmes to complement the more accommodating monetary stance. Some of this is still subject to agreement/ratification but crude estimates suggest the stimulus could be worth something approaching US$2 trillion. This could lift an aggregation of the cyclically adjusted budget deficit primary of the major economies to around 7% of GDP this year. To put this number in some context, in the aftermath of the GFC the deficit on this basis reached a high of 6.5% in 2009.
The sheer range of policy levers being drawn on and the extent to which they are being pushed provides some justification for the baseline expectation to build in some recovery coming through during the back end of the year.
“Policymakers have announced huge fiscal programmes to complement the more accommodating monetary stance. Some of this is still subject to agreement/ratification but crude estimates suggest the stimulus could be worth something approaching US$2 trillion. ”
However, it would be foolhardy in the current circumstances not to acknowledge that the risks are skewed to the downside and that the downturn could prove more prolonged, something highlighted by Angel Gurría, the OECD secretary general. A key challenge will be to avoid a second leg down once the virus has run its course either because of large-scale corporate failures and job losses, or, in some parts of the world, another sovereign bond crisis. And even if these threats can be navigated, it is still plausible that any rebound will be hampered by the reluctance of businesses to deploy fresh capital until there is more visibility about the outlook. Moreover, the prospect of elevated levels of debt both on government and corporate balance sheets is also likely to be a further drag on the nature of any emerging recovery.
The evolving outlook for the built environment sector
As far as the built environment is concerned, we are currently in the process of collating insight from RICS professionals both for the Global Commercial Property Monitor and the Construction and Infrastructure Survey as well as a for a number of residential markets. The results will inevitably reflect the impact of the coronavirus which in the first instance will hit activity hard, rather than pricing. History is pretty clear that the latter typically tends to only adjust in a material way if a downturn proves to be quite extended. The flight to quality assets is likely to be exacerbated with spreads between primary and secondary yields widening further.
Meanwhile, there are the significant implications for specific sectors of the real estate market as businesses look to build resilience to counter the threat of another supervirus and household lifestyles adjust. Amongst the most obvious points are the likely shift to a practice of more agile working where it is not already commonplace, and a further acceleration in the trend toward ecommerce.
There will be ‘winners’ in this environment; good quality logistic sites will be even more sought after and residential/multifamily will, in many parts of the world, be an obvious candidate to take up vacated space. Perhaps most interestingly, this shock has come as we are on the cusp of several technological breakthroughs that on their own have the potential to be hugely disruptive.
However one looks at these issues, it seems a safe bet that the built environment is poised to undergo some dramatic changes over the next several years.