Euro-zone

Spain

Rising gas prices will hit Spain hardest

The upward pressure on euro-zone headline inflation from the surge in natural gas prices will not be felt evenly throughout the region, with Spain looking most vulnerable. Governments are stepping in to cushion the blow, but higher energy bills are a downside risk to the euro-zone’s consumer recovery.

20 September 2021

Inflation & the outlook for bonds in the US, UK & E-Z

While we expect the yields of long-dated sovereign bonds to increase further across developed markets over the next two years, we think they will rise by more in the US than in the euro-zone and the UK. This is based on our view that inflation will prove more persistent in the former than in the latter two.

17 September 2021

Japan’s stock market may not go from strength to strength

We don’t expect the recent surge in Japan’s stock market to last, and think it will make much smaller gains over the next couple of years.

17 September 2021
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Wage growth to stay weak, inflation to keep rising

Data published this week highlight the challenge to euro-zone consumers from subdued pay growth and rising inflation. We expect inflation to keep rising in the coming months, and probably further than most expect. Next week, we will host a Drop-in webinar on the causes and effects of the recent surge in European gas prices.

Sector fortunes to shift

While the Delta variant has slowed economic activity in other parts of the world, this has not yet been the case in the euro-zone, and we are cautiously optimistic that the bloc will continue to grow. This will support the property market upturn, albeit offices and retail face structural challenges that will limit the rental recovery. Stronger rental prospects for industrial mean we think that the sector has the most scope for yield compression in the near term, though strong demand for prime assets should allow office yields to edge a bit lower too. However, further increases in yields will make some retail assets look increasingly attractive by year-end, prompting small yield falls in the next few years. The upshot is that industrial is expected to outperform over the next couple of years, but stronger capital value growth beyond 2022 will result in retail returns emerging as the strongest.

A look ahead to December’s ECB meeting

Following yesterday’s comments from ECB President Christine Lagarde, the Bank looks set to make crucial decisions about the future of QE at its December meeting. We suspect that it will end its net purchases under the PEPP next March, but increase the pace of APP purchases by more than most expect. Interest rates are also likely to remain on hold for longer than is priced into markets. Meanwhile, data from the UK suggest that Covid and shortages of both goods and labour are putting the brakes on the economic recovery there, but we remain cautiously optimistic about the euro-zone outlook.

Inflation to rise further, but then fall

Inflation will rise further from the 3% level reached in August in the coming months, but we are confident that it will drop back sharply next year, as most measures of underlying inflation and wage pressures remain very low. Meanwhile, all eyes will be on the ECB Governing Council meeting next Thursday, when we expect policymakers to announce the start of a very gradual reduction in the Bank’s asset purchases.

Spanish retail rents to rebound from next year

We expect a recovery in domestic and foreign spending along with online penetration rates below most other euro-zone markets to support moderate growth in Spanish prime retail rents over the 2022-25 period, though this is not enough to reverse the decline during 2020-21.

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