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LONDON, Dec 1 (Reuters) – British house prices rose unexpectedly in monthly terms for the third time running in November, adding to signs that the housing market downturn has abated, mortgage lender Nationwide said on Friday.
House prices rose by 0.2% on the month in November, after a 0.9% increase in October. A Reuters poll of economists had pointed to a fall of 0.4%.
Compared with a year ago, house prices were 2% lower – the smallest such drop in nine months.
Britain’s housing market, which boomed during the COVID-19 pandemic, had been hit by higher borrowing costs as the Bank of England battles the highest rate of inflation among large advanced economies.
“There has been a significant change in market expectations for the future path of Bank Rate in recent months which, if sustained, could provide much needed support for housing market activity,” said Robert Gardner, chief economist at Nationwide.
Reporting by Andy Bruce; editing by Sarah Young
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BENGALURU, Nov 30 (Reuters) – U.S. existing home sales are forecast to remain subdued next year and beyond as high mortgage rates force homeowners to stay put, according to a Reuters poll of analysts, who also expected house prices to edge higher.
The rate on the popular 30-year fixed-rate mortgage hit a more than two-decade high just under 8% last month, leading to a 4.1% drop in U.S. existing home sales last month alone to the lowest annualized rate since 2010, 3.79 million units.
The 30-year mortgage rate has since retreated a bit to levels last seen in late September, but is expected to average 6.5% throughout next year, according to the poll, not averaging below 6% until 2025.
Home resales, which account for the bulk of U.S. housing transactions, were expected to average a little over 4 million units next year. That is a far cry from an average 6 million in 2021 during the pandemic housing boom and the 5.3 million average over the past quarter century.
While interest rate cuts are on the way next year, they may not be enough to significantly alter the trend. The Federal Reserve will cut rates by 75 basis points by the end of 2024, with the first cut in the second quarter, a separate Reuters poll found.
Despite those cuts, mortgage rates are likely to be too high to entice existing homeowners to put property up for sale, analysts said.
“Existing home sales have been constrained by the lack of resale inventory available in the market,” said Crystal Sunbury, senior real estate analyst at RSM, a U.S.-based consulting firm.
“We may see more resale units come into the market, as mortgage rates ease. But resale inventory is not expected to climb substantially, as over 80% of current homeowners are estimated to have mortgages under 5% and the vast majority will not be willing to trade up their mortgage for a higher rate.”
Existing home sales were forecast to average 3.84 million annualized units this quarter, followed by 3.90 million, 4.03 million, 4.20 million and 4.38 million units over the next four quarters.
Meanwhile, property developers are cranking up housing supply to take advantage of the demand-supply mismatch. Residential investment rebounded in the third quarter after contracting for nine straight quarters.
An overwhelming 83% majority of analysts, 20 of 24, said supply of affordable homes over the coming two to three years will improve. But only five said the improvement would be enough to keep up with demand.
Poll medians showed average house prices as measured by the S&P CoreLogic Case-Shiller composite index of 20 metropolitan areas rising 2.7% this year and 1.8% in 2024. That was an upgrade from a September survey where prices were forecast to flatline in both years.
Low single-digit price rises would represent a more stable outlook in the housing market, which in the pandemic years alone soared nearly 45%. But for most first-time buyers, the average home price is already prohibitively high, requiring a huge deposit before purchase.
“The housing market continues to experience a tug of war between buyers who are priced out due to high mortgage rates and owners who are locked in to their existing mortgages,” said Cristian deRitis, deputy chief economist at Moody’s Analytics.
“Limited supply of homes available for sale will continue to support prices in the short term.”
In the meantime, many young families who can’t afford to put down a deposit or take out mortgages at these rates will have to continue renting, which has been extremely expensive in recent years. Rents are only now starting to decline more broadly.
A slight majority of poll respondents, 13 of 22, said the proportion of home ownership to renters will increase somewhat or increase significantly over the coming five years. The remaining nine said it would decrease.
(Other stories from the Reuters quarterly housing market polls)
Reporting by Hari Kishan; Polling by Anitta Sunil and Prerana Bhat; Editing by Ross Finley and Jonathan Oatis
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BENGALURU, Nov 24 (Reuters) – German home prices will fall more than previously thought this year and next as high interest rates sap demand, according to analysts in a Reuters poll who expect the supply of affordable homes to worsen and ownership to decline in years ahead.
Once-booming property prices in Europe’s largest economy have declined over 10% since they peaked last year as the European Central Bank hiked interest rates by 450 basis points in just 15 months, ending an about decade-long era of rock-bottom borrowing costs.
Those high interest rates and elevated living costs through soaring inflation in recent years have not only forced many households to choose renting over owning a home, it has also led to the worst crisis in the German property sector in decades.
With some German property developers filing for insolvency, construction activity has dropped over a third from a year ago.
The median view from the Nov. 15-23 Reuters poll of 14 property experts forecast average home prices to drop 8.0% this year and 2.8% next, steeper than the predicted 5.6% fall in 2023 and no growth in 2024 in an August survey.
“Higher interest rates forced about half of all potential buyers out of the housing market … and therefore will lead to price reductions in the German housing market in this and the next few years,” said Sebastian Schnejdar, senior real estate analyst at BayernLB.
“Moreover, there was a significant rise in the overheads for heating, electricity and communal fees, which have also increased the costs of housing for homeowners.”
That bleak outlook was despite the government recently announcing a 45 billion euro ($47 billion) support package for the property sector and measures to encourage house building, including tax incentives.
With overall economic activity expected to remain weak over the coming quarters, it could take a while for the property sector to recover.
The euro zone’s commercial property sector could also struggle for years, posing a threat to the banks and investors who financed it, the ECB said recently.
LAND OF TENANTS
Although 11 of 14 analysts who replied to an extra question said purchasing affordability for first-time homebuyers would improve over the coming year, 10 of 14 contributors said the supply of affordable homes would worsen over the coming 2-3 years.
Meanwhile, more are moving into rented homes, putting pressure on the market and rents are rising faster than salaries.
In the capital, Berlin, where cheap apartments were abundant as recently as a decade ago, the vacancy rate is less than 1%.
The median view of 12 property experts forecast average home rental prices to rise 4.0% or more until 2026.
Still, the proportion of home ownership to renters will decrease over the coming five years, according to 11 of 14 analysts. Three said it would increase.
“In the era of low interest rates, home ownership in Germany had become more popular but even if compared with most other European countries, Germany remains the land of tenants,” said Carsten Brzeski, global head of macro at ING.
“Looking ahead, the new (higher) interest rate environment will make it impossible for more people to buy property. As a result, the trend of the last decade from tenants to landlords is over. Moreover, immigration should push up the demand for rental properties.”
(For other stories from the Reuters quarterly housing market polls
Reporting by Indradip Ghosh; Polling by Purujit Arun, Rahul Trivedi and Sarupya Ganguly; Editing by Ross Finley and David Evans
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FRANKFURT, Nov 7 (Reuters) – Euro zone banks should factor in the risk of a further fall in property prices when they make provisions and plans about their capital, the European Central Bank’s chief supervisor Andrea Enria said on Tuesday.
The European property market has come under pressure from the ECB’s steepest and longest streak of increases in interest rates, which are now at record highs.
With real estate prices already falling in several countries, most notably Germany, where there had been a boom during the last decade of low interest rates, Enria told lenders to brace for more pain.
“The current higher interest rate environment could put further downward pressure on office and house prices, making it harder for commercial property owners and households to service their debt,” Enria told the European Parliament.
“Banks should account for these risks in their provisioning practices and capital planning.”
As the euro zone’s top banking supervisor the ECB sets capital requirements for banks, and has been known to push back on their plans to pay dividends or buy back shares.
Fuelled by low interest rates and massive ECB cash injections, billions were funnelled into property in the last decade, particularly in richer European countries such as Germany, France and the Netherlands.
A sudden surge in inflation over the past two years has forced the ECB to tighten the purse strings and put an end to the run in real estate prices, tipping developers into insolvency as bank financing dries up, deals freeze and prices fall.
Euro zone banks have been curbing access to credit, particularly mortgages, and demand from households and companies is also falling, ECB data shows.
Enria, an Italian, is set to step down as the chairman of the ECB’s Single Supervisory Board at the end of the year, when he will be replaced by Germany’s Claudia Buch.
Reporting By Francesco Canepa; Editing by Kirsten Donovan and Jan Harvey
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LONDON, Nov 1 (Reuters) – British house prices unexpectedly rose by almost 1% in October but the increase was due more to a lack of homes for sale than a turnaround in the market which has been hit by a jump in borrowing costs, mortgage lender Nationwide said.
Prices increased by 0.9% from September when they had risen by a marginal 0.1%, Nationwide said.
It was the biggest monthly increase since August 2022.
In year-on-year terms, prices in October were down 3.3%, a less sharp fall than September’s 5.3% drop.
Economists polled by Reuters had expected prices to fall by a monthly 0.4% and by 4.8% year on year.
“The uptick in house prices in October most likely reflects the fact that the supply of properties on the market is constrained,” Nationwide Chief Economist Robert Gardner said.
Last month, a monthly survey by the Royal Institution of Chartered Surveyors showed its members expected further falls in sales volumes in the coming months but expectations for sales in 12 months’ time turned positive for the first since May.
Britain’s housing market boomed during the COVID pandemic on surging demand for bigger homes, pushing prices up by about 25%, according to Nationwide’s measure.
But the market has been hit by the Bank of England’s 14 interest rate hikes between December 2021 and August 2023 which pushed mortgage rates to a 15-year high.
The BoE is expected to leave the Bank Rate on hold for a second meeting in a row on Thursday. But investors do not expect any rate cuts until the second half of next year.
Gardner said there was little evidence of forced selling of homes, which would push down prices, in large part because unemployment remains low, helping households to meet their higher mortgage costs, Gardner said.
BoE data for September, published earlier this week, showed the smallest number of mortgage approvals since January.
Imogen Pattison, an economist at consultancy Capital Economics, said the signs of weaker demand and of an increase in homes coming onto the market meant prices were probably only half way through a 10% fall from last year’s peak.
“While some buyers are able to accept higher mortgage payments, helping to prop up house prices, their number is dwindling as shown by the drop in mortgage approvals in September,” Pattison said.
Writing by William Schomberg; editing by Jason Neely
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WASHINGTON, Oct 31 (Reuters) – U.S. labor costs increased solidly in the third quarter amid strong wage growth while house price inflation accelerated in August, the latest signs that the Federal Reserve could keep interest rates high for some time.
The reports on Tuesday pose a threat to efforts by the U.S. central bank to bring inflation to its 2% target. Fed officials started a two-day policy meeting on Tuesday. The U.S. central bank is expected to leave interest rates unchanged but maintain its hawkish bias at the conclusion of that meeting as a recent spike in U.S. Treasury yields and stock market sell-off have tightened financial conditions.
“Those wage increases are likely to keep inflation running above target while higher house prices could lead to a pick-up in shelter inflation,” said Andrew Hollenhorst, chief U.S. economist at Citigroup in New York. “For now the Fed will remain on-hold, but the evident upside risk to inflation means Chair (Jerome) Powell and committee will keep potential further rate hikes on the table.”
The Employment Cost Index (ECI), the broadest measure of labor costs, rose 1.1% last quarter after increasing 1.0% in the April-June period, the Labor Department’s Bureau of Labor Statistics reported. Economists polled by Reuters had forecast the ECI would rise 1.0%.
Labor costs increased 4.3% on a year-on-year basis, the smallest gain since the fourth quarter of 2021, after advancing by 4.5% in the second quarter. Growth in annual compensation is gradually slowing after peaking at 5.1% last year, in line with some easing in labor market conditions. It, however, remains well above the pre-pandemic pace.
The rise in compensation helps to explain the surge in consumer spending last quarter, which contributed to the fastest economic growth rate in nearly two years.
The ECI is widely viewed by policymakers and economists as one of the better measures of labor market slack and a predictor of core inflation because it adjusts for composition and job-quality changes. Since March 2022, the Fed has raised its policy rate by 525 basis points to the current 5.25%-5.50% range.
Wages increased 1.2% in the third quarter after climbing 1.0% in the prior three months. They were up 4.6% on a year-on-year basis after advancing by the same margin in the second quarter. Strong wage growth is being driven by worker shortages that still persist in some services industries.
September’s job openings data on Wednesday will shed light on the state of demand for labor.
Though consumers continue to worry about the economy’s outlook, more are planning vacations over the next six months and are not contemplating scaling back in a major way on purchases of motor vehicles and other big-ticket items, according to a survey from the Conference Board on Tuesday.
Their concerns about the economy center around the violence in the Middle East as well as domestic politics, likely reflecting the protracted battle to elect a speaker in the U.S. House of Representatives.
The Conference Board’s so-called labor market differential, derived from data on respondents’ views on whether jobs are plentiful or hard to get, rose to 26.3 from 25.5 in September. This measure correlates to the unemployment rate from the Labor Department. Overall, the consumer confidence index dropped moderately to 102.6 this month from 104.3 in September.
“The U.S. consumer is in okay financial shape,” said Bill Adams, chief economist at Comerica Bank in Dallas. “For well-off Americans, inflation is a source of frustration but not enough to force cutbacks in overall spending.”
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Stocks on Wall Street were trading lower. The dollar gained versus a basket of currencies. U.S. Treasury prices rose.
CONSUMER CONFIDENCE EBBS
The compensation report showed private-sector wages gained 1.1% after rising 1.0% in the April-June quarter. They advanced 4.5% on a year-on-year basis. There were notable increase in wages in the financial activities and education and health services sectors. But wage growth slowed in the leisure and hospitality industry, which had experienced worker shortages.
Manufacturing also reported a moderation in wage gains.
State and local government wages shot up 1.8% after increasing 0.8% in the prior quarter. They were driven by rises in education and health services as well as public administration. State and local government wages increased 4.8% on a year-on-year basis, the most since the government started tracking the series in 2001.
Inflation-adjusted wages for all workers rose 0.9% on a year-on-year basis after jumping 1.7% in the second quarter. While slowing, wages should continue to underpin spending.
Benefits rose 0.9% last quarter after climbing by the same margin in the April-June period. They increased 4.1% on a year-on-year basis.
Economists expected the higher wages and benefits to pressure corporate profits, with Nationwide chief economist Kathy Bostjancic noting that “some companies are losing a bit of their pricing power.”
A third report from the Federal Housing Finance Agency showed house prices increased 0.6% in August, driven by an acute shortage of previously owned homes. House prices rose 0.8% in July. While lofty house prices are boosting household wealth, they could keep inflation elevated in the near-term.
In the 12 months through August, house prices accelerated 5.6% after advancing 4.6% in July. With the rate on the popular fixed 30-year mortgage near 8%, some economists see limited scope for house prices to keep rising, which would result in rents contributing less to inflation.
Higher rents were the major drivers of inflation in September after cooling somewhat in prior months.
Even as house prices continue to march higher, there are signs that shelter inflation could moderate next year.
A fourth report from the Commerce Department’s Census Bureau showed the rental vacancy rate jumped 6.6% in the third quarter, the highest since the first quarter of 2021, from 6.3% in the April-June period.
“We still think it is likely that the surge in mortgage rates will slow the rise in prices in the secondary market going forward,” said Lou Crandall, chief economist at Wrightson ICAP in New York.
Reporting by Lucia Mutikani; Editing by Paul Simao and Deepa Babington
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BENGALURU, Oct 23 (Reuters) – The Bank of Canada is probably done raising interest rates and will hold them at 5.00% for at least six months, according to a Reuters poll of economists that found a majority expecting a reduction in the second quarter of 2024 as the economy slows.
Up until recent days, the prospect of another quarter-point rate rise on Oct. 25 remained a serious risk, but a report this week showing inflation fell more than expected in September has mostly solidified views that no more is needed for now.
The economy is showing signs of strain from 475 basis points of rate hikes since early 2022, likely giving policymakers enough reason to wait and see how much more past rate decisions will crimp demand and an already cooling housing market.
In the meantime Canada’s job market remains tight, with explosive payrolls growth in September, which has left BoC Governor Tiff Macklem confident that while the economy is slowing, it is not headed for a serious recession.
The risk of a revival in inflation, last measured at 3.8%, has led most to forecast now is not the time for the central bank to strongly signal they are done raising rates.
Twenty-nine of 32 economists polled Oct. 13-20 expect no change to the central bank’s 5.00% overnight rate (CABOCR=ECI), with the remaining three expecting a 25 basis point hike.
“The Bank of Canada’s rate decision next week is going to be a hawkish hold,” said Randall Bartlett, senior director of Canadian economics at Desjardins.
“It will recognize the economy has cooled more quickly than it anticipated back in July and inflation in September, particularly core inflation, demonstrated a pace of slowing that provides us with some room for cautious optimism.”
While most are confident the central bank is done hiking, a significant minority of economists who answered an additional question, 8 of 18, said the risk of the BoC raising rates at least once more is “high”.
With inflation still running at nearly double the BoC’s 2.0% target and not expected to fall that low until at least 2025, the central bank does not yet have leeway for policy easing.
Still, a two-thirds majority, 20 of 30, see the BoC cutting its overnight rate at least once before end-June 2024. That is a slightly higher proportion than in a poll published this week on rate expectations for the U.S. Federal Reserve, which is overseeing a stronger economy.
The distribution of where economists saw the overnight rate by end-June was split many ways. Seven economists held the median view of 4.75%, 12 see it at 4.50% or lower and 11 expect it to be at 5.00% or 5.25%.
The most recent BoC business outlook survey showed the weakest conditions since the COVID-19 pandemic, underscoring worries the economy could be headed for trouble in coming months.
Housing market activity has dropped off and house prices are also falling as higher mortgage rates put pressure on households among the most indebted in the world.
While most in the latest poll do not expect a major downturn, one-third of economists surveyed had an official recession in their forecasts, defined as two consecutive quarters of contracting economic output.
“In our view, monetary policy tightening is only now fully working its way through the economy,” said Tony Stillo, director of Canada economics at Oxford Economics.
“Unlike the Bank that predicts a soft landing, we expect Canada has slipped into a recession that will help return inflation back to target by late next year. However, the Bank may choose to err on the side of over-tightening rather than under-tightening.”
(For other stories from the Reuters global economic poll:)
Reporting by Milounee Purohit, Polling by Maneesh Kumar; Editing by Ross Finley and Jonathan Oatis
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HELSINKI, Oct 19 (Reuters) – A digital euro would allow consumers in Europe to pay with central bank money but it would not be an investment object similar to cryptocurrencies, Bank of Finland board member Tuomas Valimaki said on Thursday.
On Wednesday, the European Central Bank took a further step towards launching a digital version of the euro that would let people in the 20 countries that share the single currency make electronic payments securely and free of charge.
Valimaki said the ECB’s intention is that individuals, rather than companies, could have a digital euro account with a limit to its balance.
“It is reasonable to emphasise that digital euro is being designed as a payment method, not an investment object,” Valimaki said, adding the intention was not to move household savings from commercial banks’ balance sheet to the euro system.
Valimaki said Finland is at the forefront of payment digitalisation among eurozone member countries, with the highest use of electronic payment methods including cards and mobile transfers.
Despite an abundance of options, payments methods have become less diverse, Valimaki said.
“Power is centred to a few card companies based outside Europe, which is far from ideal in terms of resilience,” he said, referring to the dominant position of Visa (V.N) and Mastercard (MA.N) in controlling digital payments.
Separately, the Bank of Finland is planning to introduce a Finnish instant payment solution that will be independent of payment cards and compatible with European standards.
Reporting by Anne Kauranen
Editing by Andrew Cawthorne and Christina Fincher
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Oct 18 (Reuters) – Morgan Stanley’s (MS.N) third-quarter profit showed a hit from lethargic dealmaking, while shares sank 7.4% as some analysts pointed to a fall in net new assets in its wealth division and disappointment over the lack of news on succession.
The bank saw a sharp drop in investment banking revenues and sluggish trading as dealflow took a hit when geopolitical risk rose following the war in Ukraine and the Federal Reserve aggressively raised interest rates.
Analysts at Goldman Sachs said they expected a negative market reaction as the inflow of assets to wealth management fell, and conversion to higher fees over the assets was slow.
Net new assets in wealth management shrank to $35.7 billion from $64.8 billion a year earlier.
Meanwhile, analysts at Evercore criticized the lack of an announcement on a long-anticipated CEO succession, which they said “is a mistake by the Board as more time can only increase angst and divide parties.”
CEO James Gorman, who has run the Wall Street giant since 2010, announced in May that he would step down within a year.
Shares fell 7.4% to a one-year low, despite the bank beating estimates.
The bank’s profit dropped about 9% to $2.4 billion, or $1.38 per diluted share, for the three months ended Sept. 30, a smaller drop than analysts had expected. Analysts had forecast $1.28 per share, according to LSEG IBES data.
Gorman said the bank “is in excellent shape, notwithstanding the geopolitical and market turmoil that we find ourselves in,” and added an announcement of his chosen successor is getting close.
“I don’t want to give you an exact time because that’s sort of a spoiler … but we’re well into it,” he told analysts on Wednesday.
The strongest candidates are co-presidents Ted Pick and Andy Saperstein, respectively heads of institutional securities and wealth management, while Dan Simkowitz, head of asset management, is also being considered, Reuters has reported, citing a source.
INVESTMENT BANKING
Revenue from investment banking, led by Ted Pick, fell 27% to $938 million, as global mergers and acquisitions activity showed few signs of improvement due to rising interest rates, antitrust scrutiny and an uncertain economic and geopolitical outlook.
Gorman said although he saw recent improvement, he expected a sustained pick up only next year. While we expect momentum to continue this year, given the fourth quarter has some seasonal considerations, we expect most of the activity to materialize in 2024″, he said.
Morgan Stanley CFO Sharon Yeshaya added that the most active industries are expected to be finance, energy, technology and artificial intelligence.
Morgan Stanley’s revenue in fixed income underwriting fell even as rivals had higher revenues with stronger market activity. Yeshaya said Morgan Stanley cannot be compared to rivals due to different considerations of capital allocation and not only fees.
Trading, under Pick, was also muted, with a 2% rise in equity trading and 11% drop in fixed income. Gorman and Yeshaya told analysts clients were beginning to reduce cash positions and put money into markets.
Gorman said he expects trading to start picking up once interest rates begin to come down. The CEO has repeatedly said the results of each unit will not be a factor in choosing the next CEO.
CRE WEAKNESS
Morgan Stanley also set aside $134 million in provisions for credit losses, surging from $35 million in the same quarter last year, driven by worsening conditions in commercial real estate (CRE). Part of the growth was a provision to cover losses with one specific loan that was not disclosed. Yeshaya said the bank has been “proactive” in the provisioning and that its exposure is smaller than 5% of the credit portfolio.
The results round out a largely upbeat reporting season for Wall Street’s biggest banks, which benefited from rising income from interest payments.
Profit at rival Goldman Sachs also dropped less than expected in the third quarter.
Reporting by Manya Saini, Noor Zainab Hussain and Niket Nishant in Bengaluru and Tatiana Bautzer, Sinead Carew and Saeed Azhar in New York; Editing by Megan Davies, Lananh Nguyen, Shounak Dasgupta and Nick Zieminski
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MARRAKECH, Morocco, Oct 13 (Reuters) – Hiroshi Wanatabe, Japan’s former top currency diplomat, recalls how Chinese policymakers eagerly studied ways to avert a Japan-style burst of an asset bubble that led to prolonged deflation and economic stagnation – until around 2015.
“Then they stopped. In the past seven to eight years, they seem to be ignoring everything they learned,” said Watanabe, who retains close ties with incumbent policymakers. “Under the Xi administration, China probably shifted its attention away from economics,” he told Reuters.
Now, China may be paying the price. Inflation is stalling and its deepening real estate crisis was identified as among the biggest risks to global growth during the International Monetary Fund and World Bank meeting being held in Marrakech Oct. 9-15.
The world’s second-largest economy is in the spotlight as a country on the brink of “Japanization,” a term describing Japan’s 15-year period of low growth and deflation after the burst of an asset-inflated bubble in the late 1990s.
Some Japanese policymakers are voicing concern partly since a prolonged slump in Japan’s biggest trading partner will deal a huge blow to their export-reliant economy.
“What’s fast emerging is the risk of China slipping into deflation, or the ‘Japanization’ of its economy,” Bank of Japan (BOJ) board member Asahi Noguchi said on Thursday.
“It’s not clear yet whether China is heading toward a situation similar to Japan. But it’s true China’s real estate sector – the backbone of its economy – is slumping, youth job losses are rising and inflation is weakening,” he said in Japan.
In its World Economic Outlook, the IMF cut China’s growth forecast for this year to 5.0% from 5.2% in April, and warned that its property sector crisis could deepen with global spillovers. It projects growth to slow to 4.2% next year.
Data showed on Friday China’s consumer inflation was flat in September, missing forecasts for a 0.2% gain, highlighting the deflationary pressure China faces even as many other countries combat too-high inflation.
Back during its deflationary period from 1998 to 2013, Japan saw core consumer prices fall 0.2% on average, as slumping property prices hit bank balance sheets and cooled investment.
To be sure, there are differences between what is happening in China and the experience of Japan. For one, China’s balance sheet stress and debt overhang are contained to the real estate sector, notably among troubled developers and local provinces.
That contrasts with Japan, where slumping property prices left banks nationwide with a huge pile of bad loans, causing a broad-based credit crunch that prolonged the economic downturn.
For now, the IMF does not see a big risk of China sliding into deflation with inflation seen accelerating, backed by a recovery in demand, Krishna Srinivasan, director of the lender’s Asia and Pacific Department, told a briefing on Friday.
But he urged Beijing to take measures, such as supporting the restructuring of distressed developers and offering guidance to local provinces, to avoid the troubles from broadening.
“Overall, we believe that China can avoid a prolonged period of sub-par growth with the right policies,” Srinivasan said, when asked about the chance of “Japanization” in China.
“The point we’re trying to make is that it’s important to address the property crisis head on, so that it doesn’t become a bigger problem.”
Reporting by Leika Kihara in Marrakech; Additional reporting by Tetsushi Kajimoto in Tokyo; Editing by Chizu Nomiyama
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