Forecasts for gross domestic product (GDP) in the Euro-zone has been downgraded from 1.5% to 1% in 2010 and 0.5% in 2011, with four member states seeing a decline in GDP in 2011 according to Capital Economics.

The analyst previously indicated in December 2009 that only Ireland would do so. However, due to cutting budget deficits in Portugal and Greece, both economies will suffer with GDP forecasts for the next two years to 2%pa and 3%pa respectively. Capital Economics has also lowered its forecast for Spain for similar reasons by 1%pa.

Fergus Hicks, property economist at Capital Economics, said: “The weaker economic growth outlook suggests that the risks to our rental value forecasts in many markets now seem to lie to the downside. For the time being, though, for Germany, Austria, Italy and Spain, we do not feel that the economic forecast revisions warrant a change to our rental value forecasts, especially as, if anything, rental values held up a touch better last year than we had expected. However, the same cannot be said for Greece and Portugal.”

Office rents in Greece will fall by -18% by the end of 2011 because of a weak outlook for employment, this is a change from the -10% previously indicated. Retail rental values have already fallen -20% so are forecasted to fall by 4% less.

Portugal meanwhile is expected to see a lower vacancy rate of 9%, giving a -3% reduction in the forecast for office rental values. However due to the negative impact of fiscal tightening on household incomes, and the relatively high shopping centre pipeline relative to stock, a -10% drop in retail rental values over the next two years is predicted, double the -5% fall in stated in previous forecasts by Capital Economics.