Is recession coming? The Indian real estate perspective
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| Is recession coming? |
Here is what Robert Lenzner from Forbes.com has to say.
The stock market peaked in April, and is behaving in the same fashion it did in late 2007, when big troubles from real estate writedowns were spreading through the financial sector.
The most worrisome statistic this week was the Empire State Manufacturing index– which was down from a minus 3.76 to a minus 7.7– a leading indicator of recession in the past. The new industrial orders index from New York remained well below zero at minus 7.8.
The Federal Reserve Board has promised to keep interest rates at zero until 2013– an admission that the economy is not expected to rebound for two years– until the next President is in the White House. This policy step indicates the Fed does not believe the economy will recover either this year or next year. Never before has the central bank made such a policy declaration for as long a period as two years.
There were 1300 new lows in the market on August 8th– another phenomenon that had not taken place since the great stagnation was triggered in 2008. Even though the market indexes made up all their lost ground, it appears that investors are willing to delude themselves that corporate profits will remain at very high levels despite the period of austerity we are clearly entering.
The austerity required in Europe to deal with the sovereign debt crisis is likely to push Europe into a recession. This will impact US corporations dependent on important profits from Europe. Economic growth in Germany slowed to a 0.5% annualized rate in the 2nd quarter. This rate of growth is far less than the US, which grew its GDP at a 1.3% rate during the same period.
The corporate return on revenues has risen the past two years to a peak of 14%– an unusually high level of profits– that is not expected to continue.
Consumer savings are rising as household debt gets paid back. But, we are a long way from safety levels of savings in a high unemployment period. And the higher the savings rise so the lower the level of consumption will be.
Housing numbers were down 1.5% last month underscoring that the turnaround in housing is not close at hand.
The most worrisome statistic this week was the Empire State Manufacturing index– which was down from a minus 3.76 to a minus 7.7– a leading indicator of recession in the past. The new industrial orders index from New York remained well below zero at minus 7.8.
The Federal Reserve Board has promised to keep interest rates at zero until 2013– an admission that the economy is not expected to rebound for two years– until the next President is in the White House. This policy step indicates the Fed does not believe the economy will recover either this year or next year. Never before has the central bank made such a policy declaration for as long a period as two years.
There were 1300 new lows in the market on August 8th– another phenomenon that had not taken place since the great stagnation was triggered in 2008. Even though the market indexes made up all their lost ground, it appears that investors are willing to delude themselves that corporate profits will remain at very high levels despite the period of austerity we are clearly entering.
The austerity required in Europe to deal with the sovereign debt crisis is likely to push Europe into a recession. This will impact US corporations dependent on important profits from Europe. Economic growth in Germany slowed to a 0.5% annualized rate in the 2nd quarter. This rate of growth is far less than the US, which grew its GDP at a 1.3% rate during the same period.
The corporate return on revenues has risen the past two years to a peak of 14%– an unusually high level of profits– that is not expected to continue.
Consumer savings are rising as household debt gets paid back. But, we are a long way from safety levels of savings in a high unemployment period. And the higher the savings rise so the lower the level of consumption will be.
Housing numbers were down 1.5% last month underscoring that the turnaround in housing is not close at hand.
So, according to the data, there is a recession coming! That is for sure.
To cut it really short, what that means is that the spending on IT and ITES from the West is going to see a major drop. Once that spending dries up, Indian IT giants and small companies alike are going to see reduced business. If these corporations do not have enough business, there is going to be less hiring. That will hit residential real estate sales in India in the long run at all levels, especially in IT driven growth corridors.
In the short run, office space demand will slow down as large companies hold back on expansion plans. If the cost cutting drive in the west is severe, then we could also see companies cutting down on their existing office spaces.
Now, to answer the primary question, Is recession coming? Just put the simple data derived forecast and the inference of the recession and you get an answer. There will be long term impacts on Indian real estate. However, with a large captive demand for housing and offices, we think we can tide over this. But, we predict that with interest rates and inflation levels still high, real estate prices will see a definite and significant correction in certain markets.
They say, water finds its own level. Now that would be good news for genuine home buyers. Just wait and see!
Excerpts from Forbes.com
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