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As we move quickly towards the end of the first quarter of 2024, we’re excited to see spring finally (sporadically) arriving in Stockholm. At Carousel, we want to take a moment to look back at our work with clients and partners, highlight some interesting trends in the finance and real estate sectors, and share our thoughts on what 2024 might look like for us professionally.
Preface
The economy is still getting back on its feet after the pandemic and the large steps taken by the Swedish central bank last year. The bond and stock markets are seeing some ups and downs, with investors feeling uncertain. While inflation seems to be under control, high interest rates haven’t dropped as much as many thought they would. Also political turbulence and warfare in some areas are reshuffling the global regularisation.
Despite these challenges, there are signs of economical optimism. We anticipate a gradual stabilisation in the macroeconomic climate towards the latter half of 2024, marked by inflation rates in the US and Europe remaining below critical thresholds. Furthermore, we expect the financial markets to benefit from less restricted monetary policies implemented by leading global economies. While an immediate reduction in interest rates appears unlikely, a continued decrease in employment rates should provide essential support for forthcoming policy decisions in the autumn.
The equity market has yet to return to its pre-pandemic levels of activity. However, a resurgence in the stock market, primarily driven by the major American tech companies and the finance sector at large, is underway. Certain industries will face ongoing challenges due to persistently high interest rates and diminished domestic demand, with the clean-energy sector being a notable example. In the realm of real estate, fluctuations are evident, largely influenced by the central bank's variable stance on monetary policy and the uncertainty surrounding the refinancing options for existing corporate bonds as well as senior debts.
The rapid advancement of AI technologies stands as a potential “X-factor” for the broader economy. Although it’s too early to identify definitive trends, we are witnessing an increasing number of corporations investing in sophisticated models to integrate these technologies into their daily operations, signalling a transformative potential across industries.
Outlook on major economies (and Sweden)
The US economy has demonstrated remarkable resilience as we entered 2024 on strong footing. Key indicators, including business activities, labour market conditions, investor sentiment, and inflation are trending positively. Despite this, challenges such as rising consumer debt and persistently high interest rates pose risks to continued economic expansion. Reflecting on 2024, it's noteworthy that US consumer spending remained robust despite elevated inflation and interest rates. In addition, government spending, due to federal non-defense infrastructure investment legislation passed in 2021 and 2022, positively impacted growth in 2023. However, many anticipate a moderation in growth rates for 2024 and 2025 as infrastructure spending levels off.
In Europe, the recovery process for 2024 appears promising, supported significantly by stable energy supplies which support growth and employment. The energy supply crisis, particularly concerning natural gas and raw materials, alongside high inflation and the European Central Bank's stringent monetary policies, has hindered Europe's economic recovery. We are closely monitoring two key risk factors for 2024: the high government debt limit in several European countries and the ongoing geopolitical tensions, including the rise in protectionist measures.
Turning to China, the economy faced a mix of highs and lows in 2023, with expectations of a challenging path ahead. Following an impressive growth in Q1 last year, after three years of strict COVID-19 prevention policies, China's GDP growth for the entire year is on track to reach the expected 5%. The high-tech industry and service sectors, however, have shown resilience, largely due to continuous government support. The governmental commitment to the high-tech sector is anticipated to persist, recognizing their potential to drive growth and innovation. Despite these positive developments, China's economy confronts significant hurdles such as declining property investment, increasing debt risks, and weak consumption growth, all of which threaten its near-term growth outlook.
In the Middle East and North Africa, regional economic growth faces pressures primarily from the war's impact and oil production cuts. Nonetheless, strong non-oil sector activity is propelling growth in several oil-exporting countries. While disinflation is expected to continue across the region, persistent price pressures remain in some areas due to country-specific factors, according to the IMF.
Looking closer at one of the key players within the region, the UAE, it is noteworthy that the nation held a prominent economic position prior to the pandemic. The onset of the pandemic led to an economic downturn within the country. Nevertheless, analyses conducted by various research organisations have reported that the UAE has successfully recovered approximately 90% of its pre-pandemic economic value. The current economic resurgence is forecasted to enhance the performance of the Dirham currency by 2024.
Focusing on Sweden, high interest rates are expected to suppress economic growth. Though inflation is beginning to decrease, reduced household purchasing power and declined domestic demand continue to challenge the economy. Early 2024 may see restrained household consumption, but a gradual recovery is anticipated as inflation eases.
The Swedish real estate market
According to Newsec, the Swedish real estate market experienced its most challenging year since 2009, inflation-adjusted. The total transaction volume for the year concluded at SEK 104 billion. This downturn can be attributed to a high interest rate environment and stringent financing conditions, which adversely affected investor confidence. Throughout 2023, yields saw a significant increase, commercial market rent levels experienced a slight decline, and vacancy rates rose in many areas.
Despite the anticipated cuts in key interest rates not materialising, we expect transaction volumes to recover this year. This optimism is supported by the growing interest from international investors, drawn to the Swedish market by its sustained high demand and favourable currency effects.
Consolidation is projected to be a key trend in 2024. Numerous non-listed and smaller real estate companies have faced difficulties in recent years. In response, several prominent Swedish real estate companies have been divesting their portfolios to reduce debt and enhance their liquidity, often at discounted property values.
We also foresee that index-linked rental growth will become increasingly prevalent in 2024, potentially complicating negotiations for renewals and relettings. Moreover, a notable trend is the emergence of tenant incentive packages, featuring extended rent-free periods and shared costs on tenant adaption.
