With a resurgent virus now impacting much of Europe, and governments across the region enforcing mobility restrictions and necessitating targeted safety measures, this seems like a good time to revisit our current macroeconomic view. For starters, since the onset of the pandemic, we accepted that the path to recovery would be gradual, incomplete and divergent. Forecasting economic activity during a massive public health crisis that is being handled in a highly fragmented manner is no easy task. Heightened uncertainty will remain an ongoing fixture and we need to be humble in the confidence we attach to any projections.
Whilst renewed lockdowns pose threats to the outlook, there is reason to believe that the impact will be less detrimental than the first round. This is because of lessons learnt during the initial experience and the fact that entire economies are not shuttering. European governments are keen to keep as many people as possible working as to avoid further rounds of massive stimulus, and will try to keep schools, construction sites and national borders open. Also, companies adapted, having made necessary investments and adjusted business plans. Finally, economic activity has picked up strongly in China and other parts of Asia, which suggests that the export-oriented manufacturing sector—the backbone of Europe’s largest economy—will be less affected.
Nevertheless, mobility restrictions will inevitably negatively affect consumer and business confidence, posing downside risks to output growth in the final quarter of 2020 and possibly into the New Year. The measures will have a direct negative effect on the hospitality sector, which was unable to stage a recovery after initial lockdown restrictions were eased. Furthermore, we’re likely to see weak retail spending in the run up to the all-important holiday shopping season, which presents a further blow to many physical stores. And finally, public support for further lockdown measures to combat the pandemic is fraying, which suggests less compliance and potentially an inability to contain the virus like was broadly achieved in summer. This could mean that a sustained bounce back in economic activity is delayed and that further lockdowns may be required.
And so, the outlook is certainly clouded over the near term, but frankly that’s not new given the type of crisis we are navigating. Yet at the same time, vaccine advancements have not only spurred global equity markets and offer real hope of a return to normality in the foreseeable future, they have also profoundly reduced downside risks. And arguably, risks are skewed to the upside from the middle of next year given pent up demand brought on by another lockdown and base effects in calculating growth. Over a five-year view, accepting that a vaccine will become widely distributable as well as acknowledging the role lingering fiscal and monetary stimulus will provide, our outlook for Europe remains aligned with our recently concluded Global House Views.
Given this macro environment, our investment approach is more focussed than ever. It necessitates a ruthless approach on asset quality, prioritising destinations that offer a compelling proposition for the customers and communities they serve. We will not compromise on location and will actively seek out structurally undersupplied markets. Flexibility is the watch word in order to readily adapt to market conditions and serve ever-discerning tenants. And finally, as a result of the current crisis, we anticipate investors will come to place greater importance on the positive impact of ESG alongside financial returns. Real estate is uniquely placed to deliver on this agenda. Sustainable buildings will deliver a meaningful impact in environmental, social and financial terms in a macro environment that is far from certain.