Century City, courtesy of Basil Soufi D, CC BY-SA 3.0.
Last week I had the opportunity to attend the Pension Real Estate Association (PREA) 24th Annual Institutional Investor Real Estate Conference in Century City (Los Angeles), California. The conference focused on the macroeconomic factors that drive real estate investment decisions. Martin Wolf, Chief Economics Commentator with the Financial Times, was the keynote speaker and moderated a panel on how the global economy is influencing investment performance. Mr. Wolf discussed two main themes—the divergence between developed countries in terms of GDP growth, and the slowdown in emerging countries.
Where we are currently, according to Mr. Wolf, is a “managed depression” where we have extraordinary monetary policy, yet low bond yields and low inflation. This runs counter to what we might expect to happen to a country with similar metrics. He said a generally deficient global demand and continued increases in private-sector debt as a percentage of Gross Domestic Product (GDP), particularly in the United States and United Kingdom, are two of the reasons we are where we are.
Economic recovery, from the countries Mr. Wolf analyzed, is most advanced in the US and UK. Recovery does not seem to be as advanced in other developed countries (in the European Union, for example). For the emerging countries, such as India and Brazil, interesting things happened there. Emerging economies had what Mr. Wolf called a “good crisis” but now are slowing down. This is due to the end of export-led growth in those emerging countries, the exhaustion of short-term stimulus policies, slowdowns in economic reforms, and China’s slowdown in economic growth.
As for what will happen next, there are significant risks and opportunities. Two of these that Mr. Wolf mentioned are that the long-run economic convergence is still a credible/possible scenario and that China might fall into the middle-income trap. Long-run economic convergence refers to the idea that countries will converge in terms of economic growth rates over time. Also, the middle-income trap is a situation where a country reaches a certain income level (based on worker’s wages) at which it is no longer competitive in the export of manufactured goods.
Stay tuned for a future blog about my time spent at the Urban Land Institute Capital Markets Conference in beautiful Kiawah Island, South Carolina.
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