Macroeconomics

Better, but still weak, economic growth is in prospect for 2024, as the delayed impact of higher interest rates feeds through. Geopolitics and stubborn core inflation are downside risks, but positive growth momentum should be evident by the second half of the year.

Key Takeaways

1. Weak economic growth is likely to make 2024 a challenging year for real estate markets, but falling interest rates will act as a counterbalance in boosting growth and contributing to a capital markets revival.
2. Although still well above the 2% target in most European markets, inflation is falling rapidly. By Q4 2024, we expect Euro Area and UK headline CPI inflation to be 1.8% and 2.6% respectively, with the UK reaching the 2% target early in 2025. Real wage growth on the back of falls in inflation is a potential upside. 
3. The next policy interest rate moves are likely to be downward. The first cut by the ECB could be as early as Q1 2024 if the economy remains weak. Cuts by the Bank of England are not expected until H2. 10-year government bond yields have already peaked, and we expect them to decline gradually through 2024 and beyond, but to remain well above the ultra-low levels of 2015 - 2021.

Economic growth to remain weak, but with inflationary pressures easing 

Weak economic growth expected in 2024

2023 had a promising start, but economic growth weakened over the course of the year. Another weak year is forecast for 2024, before a more convincing revival in 2025.

There are several key factors affecting growth. The delayed impact of higher interest rates could be negative for both consumer spending and investment. Banks are also lending more conservatively due to an increased risk of default.

Households are rebuilding their savings after using them to meet higher energy and food bills in 2022 and 2023. Governments are under pressure to recover some of the previously subsidised energy costs and to deal with the higher debt servicing costs and elevated public debt. Finally, weak world trade volumes are affecting some economies, especially Germany and its main trading partners.

More positively, falling inflation means that real wages are starting to grow, and interest rates have stopped rising. These factors will help to drive a pick-up in growth, although it is likely to be H2 2024 before this trend gains clear momentum.

Figure 1: Real GDP Change, Western & Central Europe

Source: CBRE Research

Figure 2: Real GDP Change by Country

Source: CBRE Research

Weak economic growth will have a direct impact on the occupier side of the property market. Office-based employment is expected to grow more slowly in the major office markets (from 3.5% in 2023 to 0.7% in 2024), which, on its own, will temper demand for office space.

Slowly improving retail sales and consumer spending growth, meanwhile, will frame demand for retail, logistics and leisure-related property. Reduced spending power and the steep increase in rents in 2022-2023 could create affordability issues in multi-family housing.

Main risks to the outlook

There are two principal risks to the outlook. The first is geo-political – an escalation of the crisis in the Near East or an exacerbation of geopolitical tension elsewhere could cloud business and consumer confidence and threaten higher commodity prices.

Secondly, sticky core inflation, or higher inflation caused by higher commodity prices, could defer the timing of interest rate cuts or even threaten further increases.

Inflation expected to fall, cuts to interest rates likely

Falling inflation

A combination of factors, such as the post-pandemic supply-chain disruption and the war in Ukraine in particular, pushed inflation to very high levels in 2021 and 2022. Lower energy prices and stabilising food prices led to large falls in inflation in 2023. However, higher wage growth in response to earlier inflation rises has meant that “core” inflation has been quite sticky. This now appears to be coming under control and it is likely that many countries could see inflation close to, or even below, the 2% target by the end of 2024.

Lower interest rates expected in 2024

Lower inflation and a weak economic background has meant that most central banks, the ECB and Bank of England included, have paused interest rate increases sooner than expected. If inflation continues its downward path as we expect, rate cuts are likely in 2024, initially by the ECB in H1 followed by the Bank of England in H2.

Government bond yields likely past their peak

Despite policy rates levelling off, 10-year government bond yields and other long-term debt costs hit new post-GFC highs in the Autumn of 2023 but have been falling since late October. We think long rates have passed their peak and are unlikely to ever get back to the very low levels seen between 2015 and 2021. Together with lower inflation, this means that we can look forward to several years of gradual declines in long-term interest rates. This will eventually bring some much-needed relief to property investment markets and property values.

Figure 3: CPI Inflation and 10-year Government Bond Yields, Western Europe

Source: CBRE Research