Living cities www.grosvenor.comGrosvenor’s research perspective on world real estate markets Dec 10 Dec 11 Dec 12 ForecastBoJ BoEFedECBSource:  Central banksUS$ bn

Money, Money, Money

The accelerating slowdown in China and the euro zone summit of December the 9th were the two most significant economic developments of the last month.  Both of these events point to further monetary stimulus in 2012.  The fall of the China manufacturing PMI, from 50.4 in October to 47.7, was widely reported in the press.  We think this understates the scale of the slowdown.  Our own in house indicator of economic activity, which ranges between 2 and -2 with 0 indicating trend growth, has fallen to -0.6.  With inflation falling, China should ease monetary policy quite quickly by cutting reserve requirements and, in 2012, interest rates.Although the euro zone summit failed to produce the comprehensive solution to the crisis that many were hoping for, it did make some progress.

The key measures are: a fiscal compact that constrains structural deficits to 0.5% of GDP; €200-€250bn additional funding for rescue packages; and some additional protection for private bondholders (relative to previous proposals) in the event of sovereign debt restructuring.  Importantly, the package opened the way for the ECB to engage in quantitative easing (QE) on a much bigger scale than before.By contrast, the US posted some very good economic numbers in Q3, particularly retail sales, and we think that this level of growth will continue into Q4.  Q1 and Q2 of 2012 are likely to see much tougher economic conditions.

Much of the current strength is due to high levels of capital expenditure induced by 100% capital allowances.  This policy will come to an end in December.  The recession in Europe will also hit the US harder than expected.  So, despite current optimism on the US economy, we believe the US is likely to engage in substantive monetary easing in 2012 to support economic activity….

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