Faced with a slowing global economy, the American Federal Reserve and the European Central Bank are beginning a cycle of lowering their key rates to restart the machine. In Monaco, this is good news for the real estate market, which has been too calm for several months. But, in the long term, this monetary policy could do more harm than good, and fiscal prudence seems more necessary than ever for 2025.
The markets wanted it, the central banks did it. To revive an economy lacking energy, the American Federal Reserve, the FED, the ” mistress “ of central banks in the world, began a significant reduction in its key interest rate on September 18, 2024: – 0.50%. It’s huge — maybe too much? — and this had not happened since the Covid-19 pandemic, in 2020. The objective, since November 2022, was in fact to fight against inflation, which had then risen to more than 7.7%, then 10% per year, compared to the 2% recommended by the FED. The central banks had unanimously, or almost, raised their rates to calm demand, and therefore the rise in prices that everyone was beginning to feel swelling in their daily lives, especially in their shopping carts. Problem: in turn, this increase caused a rise in mortgage rates on the real estate market, which froze a large part of transactions around the world, including in Monaco, where it has been dead calm for 18 months. Following these increases, it became more expensive to take out credit and invest, so much so that the risk of recession began to loom. To remedy this, a reduction in rates was therefore hoped for by the financial markets, and the FED finally agreed, by operating a “jumbo cut”, as we say in the jargon: a frank and massive reduction, generally carried out in good time. of crisis. This reduction, which is only the first in a series to come on the side of the FED, should very probably be accompanied by a reduction in the key rate of the European Central Bank (ECB) as well, by the end by 2024, or even by the end of October 2024 [Monaco Hebdo bouclait ce numéro le 8 octobre 2024 — NDLR]according to certain experts, including Christophe Barraud, general director and head economist and strategy of Market Securities Monaco [à ce sujet, lire son interview, publiée dans ce dossier — NDLR]. And this could have consequences all the way to the principality.
To revive an economy lacking energy, the American Federal Reserve, the FED, the “mistress” of central banks in the world, began a significant reduction in its key interest rate on September 18, 2024: – 0.50 %. It’s huge — maybe too much? — and this has not happened since the Covid-19 pandemic, in 2020
Good news for real estate in Monaco
Monaco is one of the few states in the world not to be in debt. At first glance, these central bank movements are of no importance. But that’s not entirely the case. For its real estate market, first and foremost, future rate cuts will probably provide a breath of fresh air to professionals in the sector. If buyers generally pay in “cash”, and therefore do not care about the amount of credits, this is not the case for property dealers and developers who have to go into massive debt to buy stone. This debt is, on average, 70%, as described by Sébastien Cavernes, investment director at Edmond de Rothschild Monaco. [à ce sujet, lire son interview, publiée dans ce dossier — NDLR]. Thanks to the reductions in key rates in the United States and Europe, these monetary easings therefore bode well, since they could enable a continued reduction in property loan rates: since the FED’s reduction, these rates have already passed. from 4% to 3.8%, on average, over twenty years in France. They could even drop to 3% over twenty years by the end of 2024, if the ECB follows suit and carries out a further reduction. The situation would return ” reasonable “ for buyers and investors, and this would allow banks to be more flexible regarding credit requests. For the Monegasque State, the effect would also be beneficial, since a recovery in the real estate market would offer it new tax revenues, thanks to VAT linked to real estate transactions, which are far from negligible. In 2023, overall VAT revenues accounted for 52.4% of all budgetary revenues of the Monegasque State, then estimated at 2.2 billion euros. In September 2024, the Minister of Economy and Finance, Pierre-André Chiappori, recalled at a press conference that “caution is required” for the 2025 budget, about to be debated in the National Council at the start of October 2024. “I won’t go so far as to call it a crisis, but we are in a situation which, although very favorable in many respects, is problematic in certain aspects. Perhaps this is an opportunity to introduce new thoughts and move in the direction of improving our public finances and, more generally, our economy. It is in this direction that the princely government is working”he warned.
Monaco is one of the few states in the world not to be in debt. At first glance, these central bank movements are of no importance. But that’s not entirely the case. For its real estate market, first and foremost, the future rate cuts will probably be able to give a breath of fresh air to professionals in the sector.
Sick states, under perfusion
It will therefore not be “open bar”. This should not be the case, as the global economic situation as a whole is so sick. Nothing alarming at first glance, since the indicators are quite good overall. But, with regard to the level of debts of certain States, such as France in particular, there is cause for concern. Growth is not there. In Asia, growth prospects are so weak in China and Japan that they risk dragging the euro zone down, causing it to lose market share, while inflation has still not disappeared. and that Germany accumulates 30 months of recession. Monetary easing by central banks is there to boost global growth and investor morale, thanks to a rise in asset values. But it is still necessary that the “money printing press” really serves to stimulate the economy, and not to pay off debts. This risk was particularly noted by Jacques de Larosière, director of the IMF, the International Monetary Fund, from 1978 to 1987, and governor of the Bank of France from 1987 to 1993, during a conference given in Monaco with Monaco Méditerranée Foundation (MMF) on 1isOctober 2024 [à ce sujet, lire son interview publiée dans ce dossier — NDLR]. “By lowering interest rates, central banks managed to have a world in which investment fell, and inflation rose again. I don’t really see the success of this policy. But, unfortunately, I think they will start again, he warns. Now that inflation is falling, the trend is to lower interest rates. And if they lower them as low as we have seen for around twenty years, then we will have the same phenomena in terms of the decline in productive investments and the weakening of the financial sector. »
“By lowering interest rates, central banks managed to have a world in which investment fell, and inflation rose again. I don’t really see the success of this policy”
Jacques de Larosière. Director of the International Monetary Fund (IMF) from 1978 to 1987 and Governor of the Banque de France from 1987 to 1993
Parasitic economy
What Jacques de Larosière fears, like other economists, is a return to very low rates, even to zero, or even negative, as in the aftermath of the 2008 financial crisis. Under the pretext of ” save “ the world economy from an unprecedented crisis, central banks had massively injected liquidity to revive the growth of States, at half mast. But, according to him, it is not the economy that we saved by doing this. These rate cuts, and this “magic money”were mainly used to fuel public spending and to save certain financial institutions, at the expense of savers, for whom the risk was no longer remunerated. Ultimately, inequalities would even have increased, due to these monetary policies: “I think we need to change the paradigm, and avoid this race for systematic borrowing which, in principle, feeds domestic consumption. We must start with a more reasonable policy, which gives importance to working hours, to correct remuneration by the market for savers, and to freeing the economy from excessive government supervision. These are the things that are essential. » For de Larosière, these overly accommodating monetary policies maintain, in spite of themselves, a parasitic economy of “financialization” of the world, where 77% of the wealth created is purely speculative, based on increases in prices and asset valuations, for only 23% of resource creation. This system would thus favor debt, rather than productive investment, and would reinforce social inequalities, since the increase in asset valuations would only concern 10% of the population. And to make matters worse, these new rate cuts could generate a new rebound in inflation, since this monetary creation is taking place while economic growth is weak among the major powers. For all these reasons, the announced rate cuts should not only be taken with a smile. Monaco not being a small island isolated from the rest of the world, the problems of some could also become its own.
