1Q2025 Global Economic Outlook

Highlights

·?????? Global economy still healthy

·?????? But notable divergences emerged

·?????? Policy gaining importance

·?????? Uncertainty on the rise

·?????? CRE already looks improved

Welcome back readers to our first global economic outlook for 2025. Previous readers will be familiar with this format where I scan the economies of regions around the world and offer some closing thoughts on how it all bodes for CRE. Let's get to it!

After closing out a solid 2024, the global economy looks set for another good run in 2025. Economic growth should remain steady. And while the labor market has cooled down a bit compared to just a couple of years ago, it remains healthy overall. Meanwhile, inflation should continue to decelerate. While no global central bank exists per se, various major central banks around the world will work to manage the delicate balancing act between growth and inflation. And therein lies the challenge for this year. Increasingly, the paths taken by major economies are diverging. After a very brief period of convergence, differences are widening over time. That will mean different policy stances from different central banks. Throw in the critical variable of potential policy changes coming from the new US administration and the picture beneath the global level looks more nuanced and complex. How will key, major economies navigate these challenges and what will they mean for the commercial real estate (CRE) market?

United States

The United States (US) boasts the strongest developed economy in the world. Growth during 2024 should ultimately fall near 3%, well in excess of underlying long-term potential growth of roughly 2%. While inflation superficially ran a bit hot in 2024, frequent readers of our publications already know of our concerns surrounding how inflation gets measured in the US. Either way, underlying inflation is still slowing and looks set to continue cooling in 2025. That should give the Fed enough cover to continue cutting rates, likely a couple more times this year. With the economy sustaining momentum heading into the year, consumers remaining in a healthy position, and interest rates declining, economic growth should slow a bit, toward 2.0% to 2.5%, but still exceed the growth rates other key, advanced economies, by a wide margin.

Japan

Japan finds itself in a somewhat unusual position. Among the large, developed economies, it currently maintains the highest yearly inflation rate. That stands in stark contrast to the last few decades, during which Japan struggled with very low inflation, if not outright deflation. Growth during 2024 struggled and is currently projected to come in slightly negative. Japan’s labor shortage is generating wage growth unseen since the early 1990s when Japan’s financial bubble burst. That should continue to put pressure on inflation this year, which means the Bank of Japan (BOJ) will likely continue to stand alone among major central banks as it continues to tighten monetary policy, with another couple of rate hikes likely this year. The economy looks set to rebound into positive territory as real wage growth helps to boost consumer spending.

United Kingdom

The economy in the United Kingdom (UK) faced a challenging 2024. Growth for the year should ultimately register a bit under 1%, after experiencing some slowing during the fourth quarter. Nonetheless, that rate of growth should mark a definite improvement from 2023 but lurks below the economy’s potential. Inflation during the year continued to decelerate, bottoming out in September at 1.7%, year-over-year. Since then, inflation has reaccelerated a bit, ending the year near 2.5%. On both measures, that places the UK near the middle of the large, key economies. But the outlook for this year looks brighter. Economic growth should accelerate, closer to potential. Consumer spending should get support from positive real incomes while the Bank of England (BOE) should continue to cut the policy rate, helping to remove financial headwinds. Inflation should hold fairly steady as potential fiscal tightening offsets monetary easing.

Eurozone

The Eurozone economy performed similarly to that of the UK. Economic growth should likely come in at a similar rate while inflation ended the year at an almost identical pace. Like in the UK, inflation bottomed in September at 1.7% year-over-year before reaccelerating toward the end of the year. Also similarly, economic activity slowed during the fourth quarter of last year. Nonetheless, growth should accelerate this year as consumers regain some momentum and the European Central Bank (ECB) moves to cut rates further, which should help to support private investment.

Canada

Canada’s economy posted a better result in 2024 than many had expected. Economic growth should ultimately register a bit above 1%. While that represents a slowdown from 2023, it is still a better result than most other developed economies. Concurrently, inflation slowed notably last year, falling below 2% year-over-year in August and remaining at or below that threshold for the remainder of the year. The economy looks poised to rebound this year, supported by ongoing monetary loosening from the Bank of Canada (BOC) and some temporary fiscal stimulus. The inflation rate should remain fairly constant this year, giving the BOC and the government confidence to implement stimulus measures without worrying about reigniting inflation.

China

China continues to slow, weighed down by weak domestic consumption and excess production. Those forces, among others, caused economic growth for 2024 to slow to around 5%. Those forces also pushed China into deflation for parts of 2024, although the inflation rate for the year should ultimately come in flat, give or take. The government looks set to continue stimulative policy this year, with new fiscal measures coupled with additional monetary stimulus. Ultimately, the government would like to shift away from investment (which has resulted in excess production and deflation) toward consumption which can support inflation. That could be a tall task this year, especially with the ongoing excess housing problem weighing on consumers. But after last year the government seems willing to take more active measures.

Major Policy Decisions And Risks

This section could possibly have just been entitled “Risks”, but we wanted to highlight the particular role that policy should play this year. Front and center will be the policy changes coming from the new US administration. Of these, trade should have the largest global impact. That’s not to completely discount the impact other policy changes could have, particularly since the US economy still represents roughly one quarter of real-dollar global GDP. But trade has the potential to create havoc well beyond US borders. Trade policy remains an open question, but downside risks are numerous. If the new administration uses tariffs and other non-tariff barriers in a targeted, selective manner, the risks to the global economy should remain limited and manageable. But if those measures tend toward the extreme, implemented on a widespread basis with little discrimination (potentially starting a trade war), then damage to the global economy could be substantial. Policy from China presents a second key risk. While China’s economy continues to grow faster than that of all major developed economies, it has slowed considerably in recent years. That has sapped the global economy of a major engine that it relied on heavily during the last few decades, especially after the global financial crisis when the US economy struggled to get on its feet. China still has a large impact on the global economy due to its size and rate of growth. But it is contributing less to global growth now than over the previous decade. Can policy put necessary support underneath the economy?

Finally, geopolitical risk will remain at elevated levels in 2025. Some of this will stem from changing US administrations, but no shortage of other global risks currently exists. Risks abound around the world, creating potential flashpoints and hot spots on a near-global basis. While such risks alone usually do not prove sufficient to create a global recession, they can certainly create some disruptions that can become economic headwinds under the right circumstances. For now, ongoing momentum in the US economy, coupled with mathematically high but slowing growth in China, should keep the global economy expanding at a healthy pace in 2025.

CRE And The Economy

The CRE market looks poised to continue the recovery that began last year. Market fundamentals, across property types and geographies, have held up well despite difficult circumstances. While rent growth around the world has generally slowed in recent periods, and vacancy compression has largely stalled or reversed, the asset class remains in a favorable position. That has occurred largely thanks to relatively limited supply growth, outside of a few problematic pockets. But demand has not imploded – it has simply eased after a period of inordinate strength, keeping fundamentals generally healthy. ?That should continue to support positive income returns throughout 2025. Meanwhile, global CRE capital markets are finally healing after more than two years of struggle. As major central banks began easing monetary policy last year, global CRE returns began to stabilize and then swing positive. While the pace of improvement varied by geography, as of the third quarter of 2024, all major regions of the world posted positive returns, as measured by fund-level indexes. With central banks around the world continuing to ease monetary policy, appreciation returns should continue to improve. The combination of stable, positive income returns plus improving appreciation returns should boost total returns, accelerating throughout the year.

Closing Thoughts

The global economy remains resilient, even though its undercurrents are flowing in different directions. Unless too many of them head in the wrong direction at once, which seems unlikely, growth should persist this year. While downside risks are building, especially on the policy front, they remain more of a speedbump than a roadblock, at least for now. The situation will unfold over the course of the year, but even policies that produce economic headwinds will take time to restrain the economy. And in such a scenario, slower growth seems more likely than negative growth. The good news for CRE is that it should fare well regardless of the specific economic circumstances. If the policies are largely benign, CRE could experience significantly improved performance this year. But even under a scenario of more negative policies, returns should still increase.

I hope that economic tour from around the world from my perspective offered you something insightful. Let me know your own thoughts in the comments section. Thanks for tuning in and I'll be sure to keep them coming, but we are off to a great start so far!

Ryan S.

BentallGreenOak (“BGO” or “BentallGreenOak”) includes BentallGreenOak (Canada) Limited Partnership, BentallGreenOak (U.S.) Limited Partnership (“BGO U.S.”), their worldwide subsidiaries, and the real estate and commercial mortgage investment groups of certain of their affiliates, all of which comprise a team of real estate professionals spanning multiple legal entities.

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