A recent study by Knight Frank identified economic growth, inflation and interest rates as the top key economic indicators for global housing and commercial real estate in the new year. Though it’s not easy to predict the future with certainty, the following five metrics will matter most:
1. Economic growth will be tempered
Some economies, particularly through Europe, have almost definitely entered a recession while others, like the U.S., will soon follow. Growth will remain in 2023 but the downturn is projected to be mild by historical standards, allowing economies opportunity for a reset. The cost of debt and inflation are weighing on sentiment and spending.
2. Inflation peaked in 2022
The path of inflation will decide the course for interest rates and the results will reflect through global asset prices. Central bankers, especially the Federal Reserve’s Jerome Powell, were humbled by their misjudgment in assuming inflation would be transitory, and have now doubled down on their commitment to lower inflation.
The resolve seems to be working, with peak inflation behind us. The U.S. headline rate has been declining since June with a November reading of 7.1%, a full two percentage points below the peak. Wage demands are expected to alleviate with vacancies falling back, while global supply chains are easing and oil prices have declined to be in the high $70s or low $80s, down from a high of $120/barrel in 2022.
3. Interest rates to top out early this year
Thanks to the return of double-digit inflation, 2022 saw a quick and massive change in the monetary environment as policy makers struggled with higher levels.
The U.S. Federal Reserve raised its target rate by 425 basis points in 2022. In historical context, in any calendar year the Fed has only twice hiked rates more than it did in 2022 — 538 bps in 1973 and 450bps in 1980.
The Bank of England and ECB have moved by 325 bps, to 3.5%, and 250 bps to 2.5%, respectively (main refinancing rate). The Bank of Japan surprised markets in December 2022 with a changed policy, allowing rates to fluctuate 50 bps from its 0% target instead of 25 bps.
4. Marginal rise in unemployment
Across the G7 economies, the average rate of unemployment was 5% using latest statistics, down from last year’s almost 6%. Although the headline rate will rise in many economies as growth slows, or they enter a recession, a dramatic rise in the rate of unemployment rate is not expected. The rate is projected to rise from an average of 5% in 2022 to 5.6% in 2023 and 5.7% in 2024.
This, along with more savings in bank accounts than before the pandemic, suggests that the economic downturn will be shorter and shallower than earlier cycles, a positive for most markets, including hospitality.
5. U.S. dollar will lose some strength
The U.S. dollar had begun losing some ground in 2022. In early November, at its peak, the dollar’s yearly gains were more than 10% against several currencies. This came off the back of the Federal Reserve’s previous rate hiking and the currency’s safe haven status. Only the Brazilian Real and Russian Ruble strengthened against the dollar in 2022.
However, as policy begins to change, the dollar has started to fall back and the slide will continue this year. With November’s better-than-anticipated inflation, the dollar lost 1%.
The Japanese Yen bounced on the back of the Bank of Japan’s move to change its rate-setting policy earlier this month – it was earlier down more than 20%. The pound has bounced back from lows of $1.04, which was a shock and short-lived, in September to $1.22 – still below the $1.35 at the outset of 2022.
While dollar-denominated and linked currency-denominated buyers have had a purchasing power advantage in 2022, this might reverse slightly this year.