Keynote Economist: History Says We Are In For a Hard Landing

LOS ANGELES—Richard Barkham, global chief economist and head of Americas research at CBRE, served as opening keynote that the GlobeSt. Net Lease Fall 2022 national event here Thursday morning. 

He cut right to the chase.

“A storm is coming if you read the news headlines, read the stock market and so forth. There is no doubt in my mind that we have run into headwinds in the economy.

There are three major headwinds battering the US economy right now, he said. One is inflation, which caught most economists, including Barkham, by surprise. “We haven’t seen inflation like this since the 1970s and it just came out of the blue not just in the US, but in Europe and all over.”

The second headwind is the global energy shock, particularly the rise in natural gas prices. “The movement in gas prices in Europe is enormously large,” Barkham said. “I mention that because Europe is still 25% of the global economy. As Europe grapples with this energy shock and the war in Ukraine, it is a huge headwind.

The End of the Cycle 

Headwind number three is a bit more controversial, he continued. Barkham believes we are at the end of the cycle. It was thought that getting past COVID-19 meant the end of the cycle, “but what we did was turbocharge the end of the cycle and it was too much. Unemployment is below the natural rate and when that happens, it tends to accelerate inflation.”

Barkham explained that what brings a cycle to the end are interest rates hiking up. “Demand is well ahead of supply and well ahead of the economy’s abilities to meet that demand. The Fed has to push interest rates up…they want to take some of the heat out of the labor market,” he said. He estimates that we are somewhere halfway up the interest rate cycle.

Unfortunately, he concluded, history does not bode well for a soft landing. “If you look back over history, more often than not, you end up with a hard landing after a great cycle,” he said.

Property Fundamentals Are Still Good 

So far, though, this hard landing hasn’t arrived yet and for commercial real estate in particular, property fundamentals are still good, he said. 

“Air travel and restaurant visits are holding up pretty nicely. I can’t see any evidence of a recession there.

“We have got a slowing jobs market, but jobs are still being created. It is slowing but not that slow. Finally today, Q3 gave us 2.6% GDP growth.”

But Barkham quickly pivoted back to the impending recession. “We are coming into the zone of danger in terms of economic activity. I do believe that recession is on the way. I would say we are a little bit weaker than the consensus.”

His final predictions: We will have a moderate recession in the US and worse in Europe. It might kick off in Q4 or Q1 of 2023. As for inflation, it will take time to get it under control. “I think it will happen over 2023 but it isn’t going to drop off a cliff.”