Unemployment Will Drive Interest Rates Lower
Welcome to the Real Estate Espresso Podcast – your morning shot of what’s new in the world of real estate investing. I’m your host, Victor Menasce. On today’s show, we’re taking a look at the state of the global economy and how I believe it will impact interest rates over the next 90 days. I’m going to do something that is risky: attempting to predict the future.
Everywhere you look, you hear narratives in the mainstream media that the US economy is resilient and strong. However, I’m going to construct a case that I believe will convincingly demonstrate that the global economy is actually very weak, leading to interest rates falling over the next 90 days.
When I speak about interest rates, I’m not just talking about central bank rates. I’m talking about the interest rates that really matter, which are experienced by real estate investors at the street level.
Let’s start with China. The Chinese Communist Party has been trying since the start to stimulate the Chinese economy. So far, nothing has worked. Even the package of stimulus measures announced two months ago, which they call the bazooka, has not had a measurable effect on the Chinese economy.
This week, the Chinese Communist Party announced additional measures designed to stimulate the economy. The global bond market has responded with a major yawn, indicating falling yields on Chinese government bonds. This implies that the Chinese economy will continue to weaken further.
Consumer prices in China have recorded a 0.6% decrease, signaling a decline in consumer prices, which is a sign of economic weakness. Manufacturers aim to drop prices aggressively in order to stimulate sales.
Now, let us look at Canada. The unemployment rate jumped from 6.5% in October to 6.8% in November. This significant increase in just a 30-day period has led the Bank of Canada to widely expect to cut interest rates again at their December meeting.
Europe’s two largest economies, France and Germany, are also suffering. France’s government just collapsed under a vote of non-confidence. This initiated due to the government’s efforts to push through a budget in Parliament without a vote, leading to a furious reaction and a subsequent vote of non-confidence. France can only hold one election per year. As a result, the country must form a new government from the existing make-up in Parliament until a new election date can be held sometime next year.
Virtually besieged, President Macron, who is quite unpopular at the moment, will need to appoint a new Prime Minister quickly to pass the Government’s budget and prevent an economic crisis. However, his options are pretty limited given the dysfunction in the National Assembly.
A month ago, Germany’s economy was also at the brink of a governmental collapse. This happened due to disagreement over how the country’s weak economy was being managed. This led Chancellor Olaf Scholz to sack his finance minister. The dismissal led to the withdrawal of the Free Democrats from the coalition with Olaf Scholz’s social democratic party.
Let’s also take a quick look at Greece and the U.K: Unemployment in Greece increased from 9.4 percent in September to 9.8 percent in October. Unemployment in the U.K. increased from 4 percent to 4.3 percent from August to September.
In the U.S, there is also a fall in employment, however, it’s not being referred to as such. That’s according to the official statistics announced last Friday, which claimed that the jobless rate remained unchanged at 4.2 percent for the month of November. However, with a closer look, you’ll find that nearly 700,000 people have left the workforce over the last two months.
So, when you look at individual data points, you might think the economy is slowing down. But, when you consider the aggregate of rising unemployment rates globally in all major economies, a clearer picture begins to emerge.
Given these circumstances, the Federal Reserve may pause its rate-cutting in the December meeting. Although this is only part of the story. While we did see rate cuts from central bankers, more importantly, we witnessed falling yields on government bonds when unemployment was rising globally in 2007, and we’re witnessing the same scenario play out right now.
As real estate investors, I believe we should expect a falling rate environment for at least the next 90 days. As you think about these insights, make the most of your day and go make some great things happen. We’ll talk again tomorrow.
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