The commercial real estate includes mainly three categories of assets: office, retail and industrial. Each one of these segments corresponds to a market in itself, in each town of the UK, as location remains crucial for real estate. A focus is presented on the market in London, where some assets like prime office and prime high street retail have shown strong capital value growth. These high valuations induce a risk of downturn, even if the outlook remains favorable for the time being.
The ECB sounds confident that the June package will work its way towards bank lending and the real economy, helping to bring inflation back to levels consistent with price stability over the medium term. Consistent with this objective, the TLTROs' conditions look very generous, allowing deleveraging banks in particular to borrow extra cash at the ECB from 2015 onwards.
The FOMC reduced the pace of its asset purchases by $10 billion to $35 billion as expected. Beginning next month, it will buy $20 billion of longer-dated Treasuries and $15 billion of MBS. The current Fed funds target range (0 to 0.25%) was maintained as was the forward guidance in the statement. 12 out of 16 Fed policymakers expect the lift-off in rates to occur next year.
The success of the ECB's TLTROs will be judged against banks' demand for cash, the level of interest rates on new private-sector loans and, eventually, the amount of net lending to the real economy. Ongoing constraints on banks' balance sheets will remain a drag on net lending but, on balance, we believe there is scope for TLTROs to attract decent demand (north of EUR300bn, initially) and to gain traction over time.
Who said the ECB would disappoint? The bottom line of today's policy meeting is that it may have proved most critics wrong. It will take time for observers and market participants to digest the consequences of today's easing package fully, but there is a good chance that the real economy, and the Eurozone periphery in particular, will benefit from easier credit conditions. The main justification for the ECB's decisions, which were taken unanimously, was the further deterioration in the inflation outlook, as reflected in the lower staff forecasts up to 2016.
Our French growth scenario is unchanged for 2014 relative to the previous forecasting exercise in January. We are forecasting annual volume GDP growth of 0.9%, driven by all components of GDP. The improvement will, nevertheless, be gradual, as there are significant limiting factors for the rebound in activity. These limiting factors are likely to ease in 2015.
The prospect of Scottish independence following the referendum raises thorny questions for the UK, for the new Scottish state and for the EU. The key issues are uncertainty over currency arrangements, the long-term sustainability of Scottish public finances, the significant exposure of fiscal revenue on offshore activities and the large Scottish financial services sector. The model proposed by the Scottish Government, which pledges a combination of monetary union and fiscal autarky, is not sustainable and has been already rejected by the UK authorities.
Mario Draghi yesterday twisted the long-standing rule according to which the ECB never pre-commits to future policy decision. By saying that the Governing Council was “comfortable” with acting next month, Draghi likely trapped the ECB into further easing in June. The other change in communication came from stronger rhetoric with respect to FX risks in the context of low inflation.
The rebound in Eurozone HICP inflation, to 0.72% in April, should allow the ECB to 'wait and see' for another month. However, it won't prevent a further downward revision to the staff forecasts unless inflation rebounds well above 1% in May-June – a very unlikely outcome. Given the low bar for ECB action, we continue to forecast a small Refi rate cut in June.
The ONS will release its preliminary estimate of UK GDP growth on Wednesday 29 April with, as usual, the breakdown of output per sector. We have revised upwards our forecast for Q1 growth to 0.8% QoQ, based on available activity and survey data. Our forecast for 2014 now stands at 2.8%. Growth is expected to have been broad-based in Q1, with a notable contribution from business investment and household consumption but weak net trade.