Mixed progress on vaccination means economic recovery might not hit full speed until H2, ESRI warns of the impact of construction shutdown on the housing market and rumours of the demise of the office may be greatly exaggerated. All of these stories are covered in this week’s insights update from Blackbee.
Last week’s economic news highlighted that the quicker we see world wide vaccination from COVID19, the quicker the world economy can motor ahead. We saw clear examples of this in the March flash purchasing manager index (PMI) in both the US and Euro zone. The US data was either close to or at six year highs while the Euro zone manufacturing data was the strongest since records began in 1997. Unfortunately the pace of vaccination remains mixed so far across the world. In the US President Biden last week doubled his vaccine goal to 200m doses in his first 100 days, building on already good US progress. But in Europe the rollout has been much slower – this, coupled with fresh lockdown measures announced in the Euro zone means that the European recovery looks likely to lag the US in the short term. The overall economic recovery has begun in our view, but differing paces of vaccination could mean it doesn’t hit full speed until later this year.
The impact of short term supply shortages on inflation was another theme that emerged from the PMI data. This has shaped market action in the past few weeks and this week’s ‘Chart of the Week’ shows why – when bond yields and borrowing costs increase and financial conditions generally tighten, this can often prove a short term headache for markets and equities in particular. We see such price increases as short-lived however and to this end it was interesting to hear Fed Chair Jay Powell note during last week’s Senate testimony that the Fed viewed higher inflation as “transitory or temporary”.
Equity markets had a mixed week last week, one where the technology sector struggled slightly. Looking around the world we saw Japanese and Asian equities more broadly were the losers last week. The Nikkei in Japan suffered some fallout from the Bank of Japan’s decision to reduce its purchases of Nikkei ETFs as part of its monetary policy. Other markets in Asia pulled back on concerns about rising case numbers of COVID 19 variants with the Hang Seng moving into correction territory having fallen by 10% from recent peaks.
Despite inflation concerns still floating around, bonds performed a little better last week as yields generally stabilised. Bids for government bonds around the world hardened a little, helped by rising uneasiness about the lack of vaccine progress in some parts of the world and further lockdown measures in the Euro area in particular which could well check the pace of recovery there.
So far this year oil has been the poster boy for hopes that the world economy would recover quickly this year, gaining around 25%. Therefore, it wasn’t much of a surprise to see it soften last week as a result of concerns around further economic lockdowns as well as the mixed pace of COVID 19 vaccination around the world. These concerns were also mirrored in the performance of copper and silver – two commodities the demand for which is heavily influenced by a growing world economy.
Residential/Social Housing – Gap between demand and supply of housing continues to grow.
Longer than anticipated lockdown restrictions are adding to the upward pressure on house prices. In its Quarterly Economic Commentary, the ESRI significantly reduced the number of house completions expected for this year. As public health restrictions continue for longer than expected, the ESRI is forecasting that housing completions in 2021 may plummet to 15,000, a 25% decline from 2020 levels. ESRI research professor Kieran McQuinn said on RTÉ Morning Ireland that “we will be lucky to get 15,000 units this year and even this is on the optimistic side”.
He remarked that 25,000 units would be expected to be built in normal times and described housing supply as one of the long-term economic costs of the pandemic. The significant increase in the savings ratio was also flagged as another potential factor that could push up house prices.
Concerns around the increasing gap between the demand and supply of housing were also voiced by the Irish Home Builders Association (IHBA) which commented that the case for the reopening of the construction sector was overwhelming. As reported by RTÉ, James Benson, IHBA Director said there is an urgent societal need for the reopening of the home building sector for many reasons. The significant demand for new homes was one key need with Mr. Benson arguing that according to a survey of IHBA members, 16,000 new homes could still be built this year if the sector reopened on 5th April. The IHBA also noted other risks posed by the continued closure of construction including those around skill shortages, house price inflation, company failures and job losses.
Elsewhere, rents continued to grind higher in 2020 despite the coronavirus pandemic with the Residential Tenancies Board publishing data last week showing national rents rose by 2.7% in 2020. Although the inflation rate slowed compared with a 6.4% increase in 2019, the continued gains in rents highlight the demand/supply imbalance in the rental sector.
Commercial Property – Nearly half of CEOs are anticipating a return to normality in 2022.
Rumours of the demise of the office appear overexaggerated based on KPMG’s 2021 CEO Pulse Survey published last week. The survey provided some key insights into what form CEOs believe the return to ‘normal’ will look like assuming mass vaccination occurs this year. Overall one third (31%) of the CEOs who took part in the survey expected a return to normal office life this year with the majority (45%) envisaging this happening in 2022.
The pace of vaccination distribution was a vital factor in when the CEOs believe the return to ‘normal’ will occur. As a result, nearly two thirds (61%) of CEOs said they will await a successful vaccine rollout in key markets before they ask staff to return to office. Three quarters (76%) of CEOs said that they will await government encouragement to return to the office. Interestingly only 17% of CEOs said that they would downsize their company’s office space, a dramatic fall from the 69% of CEOs who said they would downsize office space in the August 2020 survey.
Forestry – Irish forestry will continue to attract institutional investors.
High demand for timber is leading to stronger prices as reported by The Farmer’s Journal. Coillte average log prices for Q3 2020 was €72 cubic metres, higher than the 5 year price average since 2015. TFJ also reports that Irish farmer’s proportion of afforestation has dropped significantly from 2010 to 2019: 95% to 36%. While the private market has grown in the same time (26% from 2006 to 2017), this indicates the increase in institutional activity in the Irish forestry sector. As a renewable asset with multiple uses, as well as a low rate macro environment, Irish forestry will continue to attract institutional interest and large scale operations. Mr. Paddy Bruton, CEO of Forestry Services, the company which runs online market place foresttomarket.ie told The Farmer’s Journal that 213 forests sold on the website from 2018 to 2020 indicates a healthy market for forests.
Hospitality – Irish consumer confidence stronger in March, vaccines and confidence are vital for the recovery in hospitality.
According to the latest KBC Bank Ireland consumer sentiment index, consumer sentiment has rose to its highest level in 12 months. The index rose to 77.1 in March from 70.8 in February. Consumer sentiment should improve further with the rollout of vaccines. Strong Irish consumer confidence will be key to recovery in the sector in the second half of the year.