Trump, trade wars, and implications for the property markets
Donald Trump’s election as America’s 45th president initially sent shock waves across global financial markets. The immediate impact was a sharp sell-off. As soon as the news hit the wire, S&P 500 futures plunged by nearly 5 per cent. Stock indices across Europe and Asia tumbled, finishing the day firmly lower. Many wondered if Trump’s victory would be the black swan event that would ultimately trigger a global meltdown. And then, less than 24 hours later, the global rally began.
Thus far, Trump’s Presidency can be summed up in two words: “growth” and “anxiety”. The global economy has responded very favourably to Trump’s pro-business agenda. Although a market recovery was underway by the time Trump relocated to the White House, most would agree his push for fiscal stimulus has played a role in the global economy’s synchronised re-acceleration. The mere prospect that the US would lower tax rates, in combination with other positive factors, including an Asian economic recovery, sent global stocks soaring. With much of the world feeling significantly wealthier, global consumption and trade kicked into higher gear.
As a result, global GDP growth accelerated from 3.3 per cent in 2016 to 3.8 per cent in 2017, amounting to a US$2.5 trillion increase in global economic activity. The momentum is expected to continue. The International Monetary Fund recently revised its world growth outlook upwards for 2018 and 2019 to 3.9 per cent, citing US fiscal policy as of one of the key factors.
China’s economy has also fared extremely well thus far through the Trump era. Fuelled by a resurgence in net exports and stronger domestic consumption, China’s economy grew at a robust rate of 6.9 per cent in 2017. Although tariffs and protectionism have dominated recent headlines, China’s economy remains steady into 2018, growing at 6.8 per cent in the first quarter.
For the property markets, it’s a similar story of health and momentum. In fact, last year Greater China absorbed 59.6 million square feet of Grade A office space, which was a record. Leasing demand for office space was particularly robust in Shanghai at 11.3 million sq ft, Shenzhen at 8.3 million sq ft, and Beijing at 6.3 million sq ft. Similarly, it was a blockbuster year for capital markets. Last year, the sales volume of all property types in Greater China totalled US$42 billion, which was also a record. Oddly enough, whether causal or coincidental, Chinese real estate has thrived during Trump’s presidency.
However, with Donald Trump also comes anxiety. First, the timing of Trump’s push and delivery of US fiscal stimulus puts it in uncharted territory. Historically, fiscal stimulus is delivered at a time when an economy is struggling, not when it’s operating at near full employment. Some of the anxiety we are observing this year is related to the possibility that the US economy is now on a path to overheat. Hence, the rise in interest rates. But that threat pales in comparison to the escalating trade tensions that are now forming.
Putting aside his unconventional style and tweets, Trump is now following through on one of his key campaign promises to make trade agreements more favourable, in his eyes, for the US. So far, he has implemented tariffs on solar panels, washing machines, steel and aluminium and proposed them for several other products. Other countries, including China, have responded threatening retaliatory tariffs. Market reaction to these threats has been telling. The day after Trump announced the proposed tariffs on steel and aluminium, major global markets fell sharply and have experienced wild swings ever since.
While a full-blown trade war is possible, it is not probable. It is important to recognise that most of these tariff proposals haven’t gone into effect; they are just proposals. Indeed, all trading nations seem to be flexing their muscle as a method of gaining leverage during negotiations. This is not uncommon.
There is also widespread recognition that the future success of both China and US are highly connected. They are financial and trade partners: China is the top destination for US debt while the US is the top destination for China’s exports. They are also real estate partners: China has invested US$47.1 billion in US commercial real estate over the last five years, including many joint-ventures with US partners. A centrepiece of many US businesses’ growth strategy is to expand more aggressively into China, and vice versa.
Odds are high that cooler heads will prevail and the darkest scenario of a trade war will be avoided. The global economic backdrop as it pertains to commercial real estate remains in very good shape. A few months ago, the term “Goldilocks economy” was trending in the financial media. It described an economy that was healthy, operating near its optimal state, but also not too hot. In many ways, we remain in that “Goldilocks” phase. And for real estate, that is about as good as it gets.
Kevin Thorpe is chief economist of global head of research at Cushman & Wakefield