Cycle analysis suggests remaining optimistic on global economic prospects for late 2020 and 2021 despite the significant near-term damage from the coronavirus shock.

As previously discussed, recent economic weakness reflects downswings in the 3-5 year stockbuilding and 7-11 year business investment cycles. The view here remains that the stockbuilding cycle bottomed in H2 2019 while the business investment cycle is likely to reach a trough in Q2 2020.

Virus-related production shutdowns may result in a near-term further drawdown of inventories but the restocking phase of the stockbuilding cycle will be correspondingly stronger when it arrives, probably in H2 2020.

Expected recoveries in the stockbuilding and business investment cycles in H2 2020 should be accompanied by an acceleration of the longer-term housing cycle upswing.

The housing cycle has ranged between 15 and 25 years historically, averaging 18 years, based on intervals between major troughs. The first chart illustrates the cycle using US data, which is less distorted by the two world wars.

The UK cycle can be traced back to the early eighteenth century (at least) but has been evident in recent decades in turnover data (including secondary transactions) and house prices rather than construction activity, which has been constrained by land availability – second chart.

The housing cycle still shows more variation across countries than the business investment and stockbuilding cycles but rising cross-border capital flows in recent decades have increased the degree of synchronisation.

The last major low in the “global” cycle was in 2009, implying that the next could occur around 2027 based on the 18 year average length, with a range of 2024-2034.

Housing momentum fluctuates significantly within the cycle, reflecting the influence of the shorter-term cycles and the sector’s sensitivity to interest rate movements.

G7 housing investment fell from late 2017 in response to a rise in long-term interest rates from mid 2016 but stabilised in H1 2019 after rates peaked in late 2018, recovering later last year. The recent further fall in yields will fuel the revival, suggesting strong investment growth in late 2020 / 2021 – third chart.

The annual rate of change of G7 housing investment reached a low in Q4 2018 and usually bottoms ahead of the rate of change of business investment – the lead at the last 11 lows in the latter ranged from 10 quarters to no lead, with an average of 4.5 quarters. The Q4 2018 low in the housing investment change, therefore, is consistent with the expectation that the business investment cycle will bottom in H1 2020.