Leading Indicators | Rising global geopolitical tensions see renewed demand for safe-haven assets

Discover key economic and financial metrics, and what to look out for in the week ahead.

Written By:

William Matthews, Knight Frank

14 Nov 2023

2 minutes to read

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Here we look at the leading indicators in the world of economics.

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RACE TO RATE CUTS NOW ON?

UK economic growth was flat in the third quarter of 2023, slowing from a +0.2% expansion in the previous quarter but above market expectations of a -0.1% contraction. This was the weakest pace of growth since Q3 2022, suggesting the weight of the BoE's historic monetary tightening run is beginning to take effect.

As we approach the end of the tightening cycle, attention turns to which advanced economy will be the first to see interest rates fall. Most economists currently forecast at least two rate cuts from the MPC and Fed next year, albeit with differing opinions on when the first rate cut will be. One view from Oxford Economics is that both the Fed and the BoE will start cutting rates in Q3 2024. However, in the Euro Area, rates are expected to fall faster and by a greater amount, with 150bps of rate cuts priced in next year, falling to 3.00% by the end of 2024. Meanwhile, negative interest rates in Japan are forecast to end next April, lifting to 0% from -0.1% currently, according to Oxford Economics.

UK BORROWING TO SUPPORT BOE’S INFLATION TARGET

Following the pandemic-induced surge in borrowing and more than a year after the 'mini-budget' that would have seen the UK run substantial deficits to fund tax cuts, government borrowing is roughly in line with pre-pandemic levels, at least relative to the size of the economy. This priority of fiscal restraint and lowering inflation to the 2% target will likely continue for some time. The topic even featured in the King's Speech last week and will most likely be a strong focus in the Autumn Statement on 22nd November.

In line with less government borrowing, the UK 30-year gilt yield has fallen back to c.4.7% from above 5% in October. Meanwhile, the 5-year SONIA swap rate is currently at 4.23%, a six-month low. As financing costs remain elevated, we may see more CRE transactions next year, should investors choose not to refinance and bring assets to market instead.

GEOPOLITICAL RISK REACHES 17-MONTH HIGH

The geopolitical risk (GPR) index has increased by +91.7% m-m in October to its highest level since May 2022, but remains below the recent peak in early 2022, following the outbreak of war in Ukraine. Safe-haven assets, including commercial real estate, typically receive renewed demand in times of heightened geopolitical tension. Indeed, global cross border CRE investment totalled $18.2bn over September and October, a +26% increase compared to investment over July and August. Cross-border investment was up +25% in the UK over the same period.

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