European economic contraction
Making sense of the latest trends in property and economics from around the globe.
4 minutes to read
European economies wobble...
New figures from Europe's three largest economies reveal a marked slowdown in private sector activity during August, with confidence at or close to record lows and some pretty broad-based falls in new demand.
The headline S&P Global Flash Germany PMI Composite Output Index dropped to 47.6, from 48.1 last month. Readings below 50 signal a contraction. August's drop off is the fastest fall in business activity since 2020. German businesses are struggling with both weaker inflows of new business and weaker export sales. There were near-record increases in inventories during the month, despite the fact that goods producers have been pulling back purchases of materials and components.
Likewise, the corresponding reading in France fell to 49.8, its first sub-50 reading since February 2021. The drop in new orders was broad-based, but once again manufacturers saw the sharpest deterioration in demand, led by hesitancy among clients, inflation and weak underlying market conditions.
The European Central Bank raised its key interest rate by 50-basis points last month, the first hike in more than a decade. Mortgage rates are now rising across the Eurozone. Average rates sit at about 1.94%, well above the low of 1.3% registered last September. That's the largest increase in borrowing costs over a nine-month period since 2006. Meanwhile, the euro has now slid more than 12% against the dollar this year, taking it below parity for the first time in two decades.
...but inflationary pressures ease
The UK figures are marginally better, but not by much. The headline reading came in at 50.9, down from 52.1 in July. That's the most sluggish growth for 18 months. Again, manufacturers led the decline, with the index dropping to 42.4.
Private sector employment continued to rise in August, though the rate of job creation was the softest seen since March 2021. Some firms mentioned choosing to not replace voluntary leavers amid softer demand.
There are silver linings on inflation in all three releases. In Germany the overall rate of input cost inflation eased for the fourth month in a row to the weakest since September. Manufacturers reported a softening of some materials prices and a further easing of supply bottlenecks. Both input and output cost inflation fell in France. The rate of cost inflation softened at UK manufacturers to hit the lowest since November 2020.
Flora Harley took a deeper dive into the UK economic data yesterday. That includes her thoughts on why the drop off in activity might not be as steep as many think.
Jackson Hole
The White House trimmed its economic growth forecast for the year to 1.4%, after adjusting for inflation. That's down from 3.8% in March. It now expects inflation to hit 6.6% for the period, up from 3.8% in March.
The Fed will hold its annual three-day gathering at Jackson Hole starting Thursday. Fed Chair Jerome Powell used last year's speech to set out why he believed inflationary pressures were "transitory" and should "wash out over time". Oh well.
Consensus is emerging that he's likely to turn slightly more dovish than the Fed's previous meetings this year. Goldman Sachs Group Chief Economist Jan Hatzius thinks he'll signal a slowing in the pace of interest rate hikes is coming due to a risk of overtightening.
Law firms in London
Law firm take-up in London continued its record-breaking streak during Q2, with over 400,000 sq ft of space acquired. That equates to 13% of London take-up and nearly a quarter of City take-up.
The largest deal was Kirkland & Ellis’s 218,600 sq ft pre-let at M&G Real Estate’s 40 Leadenhall development, EC3 which Nuveen is developing. The scheme is targeting a five-star NABERS rating as well as BREEAM Excellent, SmartScore platinum and WELL platinum ratings.
The analysis from Jennifer Townsend provides further evidence of the trends articulated in our latest law firm research (linked in the piece above). ESG, health and wellbeing and connectivity are all to the fore along with a preference for best-in-class space in amenity rich locations that can flex to changing working practices and client needs. With 1.28m sq ft of active legal sector requirements across London we anticipate further relocations throughout the rest of 2022.
In other news...
Gatwick upgrades passenger forecast but warns of economic slowdown (FT), markets believe UK interest rate will hit 4% by March (Times), KPMG consolidates in NYC (Bloomberg), and finally, China's worst drought in decades (Bloomberg).