Concerns about the fragility of the Eurozone recovery have intensified since the spring. Against a background of conflict in Ukraine, slower export markets and deflationary forces at home, confidence has faltered. Growth continued in these markets, but it has been increasingly insipid. By the autumn, the fear was growing that the single currency area could slip back into recession, despite European Central Bank efforts to re-start activity with repo rate cuts.
But much of the current Eurozone weakness reflects factors that we believe will prove temporary. The data suggest that underlying conditions in the Eurozone are improving, albeit slowly. Next year, fiscal headwinds will ease, while employment and incomes will also revive. Stronger global demand will reinforce this domestic healing through exports. As we show in our forecasting infographic below, our central expectation is that the economic recovery will continue, albeit weakly at first. But this will drive a steady revival in occupier demand and an upturn in prime rental growth.
But there still remains a significant downside and a one in three chance that the economy will follow a less elevated road. If deflation takes hold in Eurozone, the economic prognosis could be much less good, as long and painful Japanese experience has shown. For real estate markets this downside scenario would translate into stagnant occupier demand and rents languishing for several quarters more delaying the recovery into 2015 or perhaps later.