Euro Area households are more sheltered to an economic slowdown than those in the UK, but global geopolitics will influence European exports
A low interest rate environment will continue to boost retail sales. Investors in search of attractive retail locations will be paying close attention to consumption growth. According to Focus Economics, Spain and Portugal are forecast to witness consumption growth of 1.6% pa over the next five years, above the Euro Area average of 1.3% pa.
One of the challenges of a low interest rate environment for retailers is that rather than increasing consumption, households have endeavoured to pay off their existing debt levels. Since 2010, Euro Area household debt has fallen from 64% to 58% of GDP, as households have generally kept their consumption levels stable, with only a recent uptick in the household savings ratio to 12.6% of gross income (see Chart 5). Although this has not played into the hands of retailers, this has provided insulation to future downturns, so on balance can be considered positive.
Since Brexit, however, UK households have more than halved the proportion of gross income saved from 9.4% to only 4.4%, suggesting that UK households are more exposed to downside economic risks (see Chart 5). It is estimated that for every €1 billion of online retail sales, this results in an increase in demand for 75,000 sq m of warehouse space. Using Forrester’s forecasts, this indicates a need for a net additional 15m sq m of warehouse space over the next five years to meet the rising demand for online retail alone.
A weaker Euro Area interest rate will, of course, depreciate the euro, making exports more attractive in a global context, in a time when the Eurozone manufacturing sector continues to drag on overall economic growth. Since February 2018, the euro/dollar has fallen from $1.25 to $1.11 in September 2019, according to Morningstar. Cheaper European exports could thus, generate new demand for logistics space in proximity to Europe’s busiest cargo ports and arterial routes. This will act as a welcome boost for Europe’s manufacturing sectors as Euro Area exports are expected to grow by 2.5% pa over the next five years, down from 4.6% pa over the previous five years.
However, the lingering prospect of a trade war between China and the US continues to hamper growth in the manufacturing sector. Eurozone Manufacturing PMIs have been below 50 (signalling a contraction in output growth) ever since February 2019, which could reduce demand for logistics space in Europe. There is, however, a range in the latest manufacturing outputs – between December and July – industrial output in Germany declined by over 4% whereas in France it rose slightly. This has been partly due to the automotive (more cyclical) output in Germany, compared with the pharmaceutical and energy sectors (less cyclical) in France.
One of the biggest concerns for European logistics operators is the shortage of available, affordable labour to develop their supply chains. The EU unemployment rate currently stands at 6.3% in the EU, the lowest level since records began, which has increased wages by 3.1% for the year to Q2 2019. With over half of warehousing costs accounted for by wages, wage growth will continue to reduce logistics operators’ profit margins. We expect further westwards migration across Europe to take advantage of tighter labour markets and higher wages, however, we expect this to struggle to keep up with the pace of online retail sales growth, as retailers will be less sensitive to rental increases.
Read the articles within Spotlight: The impact of a low rate environment below.