outlook 2017 - dbresearch.com€¦ · rate of growth above the medium-term potential rate based ......

Focus Germany

German GDP growth is expected to slow somewhat in 2017 following

considerable momentum over the last two years. We note the growth rate will

almost half, to 1.1%, in 2017, but around half of this is due to a smaller number

of working days. While the economy will likely have to do without a number of

special factors that provided a boost to domestic demand in 2016, we believe

that the underlying robust domestic economic growth path remains intact. Weak

global trade and political uncertainty will dampen exports and investments.

Global economic momentum is expected to pick up somewhat in 2017. German

export growth is likely to remain muted, though, due to the weak European

economy, where the outlook is dampened by political uncertainty, lower credit

growth and rising inflation. A pick-up in US growth, also due to the economic

policy measures expected from the new administration, and the end of the

recessions in Russia and Brazil could facilitate an increase in global growth from

around 3 to 3 ½%.

The (geo)political environment is characterised by considerable uncertainty in

2017. Donald Trump’s election promises have increased concerns about the

future of free trade. The rise of populism and upcoming elections in major EU

countries complicate further the EU’s myriad challenges, such as the Brexit

negotiations, the refugee issue and the creation of more robust institutions and

structures. Political uncertainty is expected to weigh on investment plans of

many companies. We anticipate a drop in domestic equipment investment.

The ECB has in all but words indicated that tapering will begin in 2017.

European interest rates are likely to remain at very low levels in 2017, at least at

the short end. Although the Governing Council of the ECB has extended its QE

programme until the end of 2017, the monthly volumes are set to be scaled

back from April onwards. If the ECB’s relatively optimistic assessment of the

economy is confirmed, it could continue tapering the QE programme at the end

of 2017. We anticipate, however, that the ECB’s key rate will remain at 0% for

the foreseeable future, widening the yield gap between Europe and the USA

and resulting in a depreciation of the euro.

The German domestic economy will shift down a gear in 2017, but will likely

remain robust thanks to the healthy labour market. Employment growth is likely

to slow in 2017, also as a result of the pronounced shortage of skilled workers.

In an environment also characterised by normalising inflation – which could

climb from ½ to 1 ½% on the back of rising energy prices – real income growth

is likely to slow slightly. Private consumption, however, will remain the main

driver of growth, expanding by a good 1%. Government spending increased by

around 4% in 2016 driven by the refugee crisis, this rate could be halved as the

influx of refugees slows. The construction industry is expected to report solid

growth of 2%, although this comes as a disappointment given the considerable

order backlog and favourable financing environment. Construction activity is

likely to be hindered by the limited supply of labour and regulatory hurdles.

Authors

Barbara Böttcher

+49 69 910-31787

[email protected]

Eric Heymann

+49 69 910-31730

[email protected]

Jochen Möbert

+49 69 910-31727

[email protected]

Heiko Peters

+49 69 910-21548

[email protected]

Oliver Rakau

+49 69 910-31875

[email protected]

Stefan Schneider

+49 69 910-31790

[email protected]

Editor

Stefan Schneider

Deutsche Bank AG

Deutsche Bank Research

Frankfurt am Main

Germany

E-mail: [email protected]

Fax: +49 69 910-31877

www.dbresearch.com

Content Page

Outlook 2017: Solid, despite diminishing tailwinds ..........................................................1

Forecast tables ............................................. 13

DB German Macro Surprise Index ................ 14

Export Indicator............................................. 15

Event calendar .............................................. 16

Data calendar ............................................... 16

Financial forecasts ........................................ 17

Data monitor ................................................. 18

Original in German: December 16, 2016

December 21, 2016

Outlook 2017 Solid, despite diminished tailwinds

Outlook 2017

2 | December 21, 2016 Focus Germany

2016: Domestic economy managed to ride out the turbulence

Following two years in which growth was already strong (1.6% and 1.7%), the

German economy was once again able to pick up speed in 2016 with the

economy likely growing by almost 2%. This means that the economy was able

to ride out a large number of uncertainty factors that arose during the year.

Neither Brexit, nor the tough US election campaign and its surprising outcome

nor the sustained political uncertainty in the euro zone have left a material

imprint on German domestic demand. The economy was even able to handle

the ongoing slump in global trade growth, which more than halved again in 2016

in real terms.

This performance is thanks to robust domestic economic growth drivers, which

were strengthened by a number of temporary factors. Real consumer

purchasing power, for example, benefitted from the low inflation, fuelling growth

in private consumption of around 2%, as in the previous year. Government

spending increased by as much as 4%, an even greater increase than during

the economic and financial crisis. Spending on refugee care and

accommodation is likely to have played a key role in this trend. The strong

construction industry also made its contribution to the domestic economy.

On the other hand, foreign trade put a considerable damper on the economy,

with export growth falling to around 2% from more than 5% last year. While the

slowdown can be traced back to a broad range of factors, the decline in demand

from the US had the greatest impact. This meant that the corporate sector

barely stepped up its investment activity, with some quarters of the year even

revealing a considerable drop in machinery and equipment investments – a

burden that will be carried into 2017 – probably also due to the considerable

political uncertainty.

At just under 2%, headline GDP growth was consistent with our forecast from a

year ago, although the divergence of the domestic economy and foreign trade

was much more pronounced than expected.

2017: Fewer tailwinds for the economy

The German economy is expected to shift down a gear in 2017, and we forecast

a growth rate of 1.1%. Although this means that the rate will be almost halved,

around half of this effect is due to a working day effect. After adjustments for this

effect, growth only slows from 1.8% to 1.4%. This would still, however, put the

rate of growth above the medium-term potential rate based on Germany’s

demographic outlook and productivity trends.

The slowdown is based on our expectation that the strong tailwind that has

benefitted private consumption and government spending alike will taper off due to

rising inflation and the marked decrease in the number of refugees entering the

country. As energy prices rise due to oil prices, inflation is expected to climb from

0.5% to 1.6%. We have also assumed that the influx of refugees will remain on a

par with the level seen in the autumn of 2016 (16,000 per month), i.e. much lower

than the level seen back in the autumn of 2015 (180,000 per month). With growth of

at least one percent, private consumption is, however, likely to remain the main

pillar propping up the economy thanks to the sustained robust situation on the

labour market combined with the increase in the minimum wage. Government

spending and gross fixed capital formation in construction are also likely to outstrip

the average growth seen over the past five years, increasing by at least 2% and

providing a boost to the domestic economy in the process. The increase in

construction investment that we have forecast nevertheless comes as a

disappointment in light of the considerable excess demand in the residential

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-5

0

5

10

15

20

00 02 04 06 08 10 12 14 16

GDP in G20 Global trade

Real, % yoy

Sources: PIG, CPB, Deutsche Bank Research

Global trade remains very weak in 2016 1

-80

-60

-40

-20

0

20

40

60

80

100

120 -30

-25

-20

-15

-10

-5

0

5

10

15

20

93 97 01 05 09 13 17

Equipment investment (left)

Policy uncertainty (right, inv.)

Change yoy, index points, 4Q avg., 3Q lead (left); % yoy, real (right)

Sources: Federal Statistical Office, Haver

Uncertainty dampens investment 2

-3

-2

-1

0

1

2

3

4

5

10 11 12 13 14 15 16 17

Private cons. Govern. cons.

Equipment inv. Construction

Inventories Net exports

Real GDP

Contribution to yoy real GDP growth, pp

Sources: Federal Statistical Office, Deutsche Bank Research

Consumption drove growth 3

Outlook 2017


construction segment and the government’s infrastructure plans. Capacity

bottlenecks due to the shortage of skilled workers and state/regulatory hurdles are,

however, likely to stand in the way of greater supply growth.

The outlook for Germany’s export economy paints a mixed picture on the whole.

While the global economy is expected to show stronger growth in 2017, the

European economy is likely to lose momentum. Since this region accounts for a

very large proportion of German exports, this means that any acceleration in

demand will only be marginal. All in all, we expect Germany’s export growth to be

similarly subdued to that seen in 2016. Together with the ongoing uncertainty, this

will create an unfavourable investment environment and is likely to put a damper on

industrial production. We expect to machinery and equipment investment to decline

in 2017, despite above-average capacity utilisation, and a moderate increase in

industrial production of just under 1%. However, this is unlikely to put meaningful

pressure on the government budget. Thanks to the robust domestic economy,

Germany should once again be able to generate a slight budget surplus.

International environment: Good and bad news

The global economy is likely to pick up speed in 2017. Following growth of

around 3% in 2016, it could expand by approximately 3.5% in 2017 – the

highest rate seen since 2011. This development will be driven mainly by a

stronger US economy and by Russia and Brazil, which we expect to be able to

leave their recession behind, even though their growth rates are expected to

remain moderate on the whole. Like many other emerging markets and

developing countries that are also commodity exporters, Russia and Brazil stand

to benefit from rising oil and other commodity prices, following considerable

pressure on these prices over the last two years. The global upturn is, however,

also expected to gain ground outside of these countries. Around two-thirds of

the countries included in our analysis are expected to up their growth rate year

on year in 2017. In 2016, less than half of these countries achieved this.

USA: What can we expect from Trumponomics?

The outlook for the US is positive overall. Although the US economy is tipped to

report the lowest growth seen since the recession of 2009 in 2016, with growth

of around 1.5%, the two main factors standing in the way of investments in 2015

and 2016 – the correction of the high inventory levels and the low price of oil –

are likely to be much less of an issue in 2017. In addition, consumption is

expected to increase considerably thanks to rising wages, and the plans

announced by the new US government should provide stimulus in the second

half of the year in particular. This means that US GDP growth could increase to

around 2.3% in 2017 and as much as 3.5% in 2018.

From an economic perspective, dramatic cuts in corporate and income tax,

coupled with higher infrastructure investments and increased spending on the

US military, are likely to be the central pillars. However, the scope, timing and

impact of these measures are extremely uncertain due to the lack of detailed

information available. For the purposes of our forecast, we have assumed that

the extensive tax cuts announced for the corporate sector and households will

be agreed around the middle of the year, and that US President Trump will

manage to push a large part of his plans through Congress.1 This will be no

mean feat, as many Republican representatives are “fiscal hawks” who take a

negative stance on larger budget deficits. In particular, however, a reduction in

corporate taxes, which are high by international standards, could have a real

1 Hooper, P., Luzzetti, M., Slok, T. (2016). Using the Fed's model to evaluate Mr. Trump's fiscal

proposals. Global Economic Perspectives. 6 December 2016. Deutsche Bank Research.

-4

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-2

-1

0

1

2

3

4

5

6

7

01 03 05 07 09 11 13 15 17

Global GDP (nominal GDP)

Global GDP (share in German exports)

Global GDP (PPP)

Sources: Eurostat, Deutsche Bank Research

% yoy, weights for calculating global GDP growth in brackets

Foreign demand for German products not to pick up until 2018 4

Outlook 2017


impact very quickly by providing greater incentives for investment that would

also benefit German exporters. On the other hand, the spending plans for

infrastructure and the military are unlikely to play a significant role before 2018

due to the longer planning periods involved and a transmission lag of around

two quarters from higher US to higher European growth.

The positive growth outlook is likely to allow the US Federal Reserve to plough

ahead with its gradual normalisation of interest rate policy. The hesitant interest

rate hikes implemented at the end of 2015 and 2016 could be followed by at

least two further rate hikes in the course of the year, bringing the federal funds

rate up to over 1% by the end of 2017. This is likely to provide new impetus to

the US dollar, because other central banks are expected to maintain their

extremely low interest rates due to less favourable economic conditions, which

will make the prospect of shifting capital to the US an attractive one. This could

result in the US dollar achieving parity with the euro in the first half of the year,

even appreciating to 0.95 by year-end.

Euro zone: impetus on the wane

Europe is the only region in which growth in 2017 is likely to be much lower than

in 2016. We expect the euro area to report growth to the tune of 1.3%,

compared with around 1.7% (2016) and just under 2% (2015) in the last two

years. The UK economy is also expected to slow, which is likely to have a

markedly negative impact on the German corporate sector due to the

considerable depreciation of the British pound.

We believe that there are four main reasons behind the slowdown in growth in

the euro area. First, after the slump in oil prices provided a boost to real

incomes in 2015 and 2016, inflation will now start to act as a source of

headwind as it gradually returns to normal. At the same time, the recovery on

the labour market has not yet reached the stage at which it could be offset by a

more pronounced increase in wages. Another source of headwind comes from

the flagging growth in lending to the real economy. This recently stabilised at a

low level, which points to a reduced impetus to the domestic economy. We also

expect fiscal policy to provide less impetus. The final factor is the considerable

political uncertainty, which, as in Germany, is expected to make businesses

more reluctant to invest.

Uncertainty is the name of the game

The outlook for 2017 is characterised to a considerable extent by (political)

uncertainty. As a result of Brexit, the US elections and the upcoming elections in

the Netherlands, France and Germany in 2017, as well as the fact that an

election is now also likely to be called in Italy, it has reached an all-time high, at

least looking at the news-based indicators. Financial market-based uncertainty

indicators show a less dramatic situation, presumably also due to the sedatives

prescribed by the central banks. There is a clear link between considerable

(political) uncertainty and weak investment growth. Companies are not only

likely to find it more difficult to finance larger-scale investments in uncertain

times; the option of postponing investment decisions can also hold an appeal

because it allows companies to be more certain about their future sales

opportunities.

From the perspective of German exporters, we believe that the uncertain future

of trade relations between the UK and the EU, as well as the mounting global

scepticism towards free trade among policymakers and voters alike, are the two

main medium-term risks at present. If Donald Trump were to implement all of his

protectionist election promises once in office, this would be a bitter setback for

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

15 16 17 18

Baseline No personal tax cut Corporate tax cut to 25% Full fiscal stimulus

Sources: FRB, Deutsche Bank Research

% yoy, Fed's baseline expectation and different fiscal scenarios calculated with FRBUS

Trump's fiscal plans could significantly increase GDP growth 5

-10

-8

-6

-4

-2

0

2

4

6

03 05 07 09 11 13 15

Credit impulse (% GDP)

Private domestic demand (% yoy)

Sources: Deutsche Bank Research, ECB, Eurostat

Weaker credit growth = risk for euro-area domestic demand 6

0

100

200

300

400

500

600

700

800

98 00 02 04 06 08 10 12 14 16

China Germany

Italy Russia

UK USA

Sources: Deutsche Bank Research, Haver

Economic policy uncertainty, news-based, 6 months moving average

Marked uncertainty 7

Outlook 2017


free trade and would likely create significant headwind for global trade. The

sluggish, and in some cases failed, negotiations on new major free trade

agreements and the rising number of trade barriers have already been holding

back global trade growth in recent years.

One major risk that could materialise in the near future is the effect that rising

interest rates in the US will have on international capital flows. Rising interest

rates and a stronger US dollar could end up mutually reinforcing each other,

fuelling a shift in capital to the USA. Emerging markets and developing

countries, in particular, could end up being hit hard, just as in 2013, if the

refinancing/repayment of their debt denominated in US dollars becomes more

expensive, which could deal a blow to their demand for German investment

goods. Furthermore, there are risks hanging over the Chinese real estate

market, which has recently been characterised by substantial price increases.

We expect GDP growth in China to remain virtually unchanged at 6.7% in 2017

thanks to monetary and fiscal policy support; if shockwaves are sent through the

real estate market, however, this would have a considerable impact on the

global economy given the size of the Chinese economy.

Germany & Europe: Decisions that will shape the next decade

2017 will be a year of elections. In Germany, the main political event will be the

German parliamentary elections in September. Pundits are particularly

interested in whether Angela Merkel will manage to be elected Chancellor for

the fourth consecutive time, with current surveys (see figure to the left)

suggesting that she will. Merkel’s CDU/CSU party alliance has a clear lead over

the SPD – almost 14 percentage points ahead in mid-December. This lead

could, however, narrow if the SPD opts to appoint the more popular current

President of the European Parliament, Martin Schulz, as their candidate instead

of party leader Gabriel. Olaf Scholz, First Mayor of Hamburg, on the other hand,

is less likely to stand.

Angela Merkel likely to continue as German Chancellor

Even if Angela Merkel remains Chancellor, it is not clear which party she will

choose as her coalition partner. The Chancellor has said that she does not have

any favourites among the current parliamentary parties. The next German

Bundestag is likely to see seven parties represented: the conservative CDU and

CSU, the social democrats (SPD), the Left Party, the Greens, the right-wing

populist Alternative for Germany (AfD) and the Liberals (FDP). As things stand

at the moment, this sort of parliamentary diversity would only give the CDU/CSU

the option of entering into another grand coalition, or forming a three-party

alliance with the Greens and the FDP. The latter is unprecedented and would

likely require considerable coordination efforts among the partners.

Obviously, a lot can change in terms of the dynamics surrounding the main

political issues between now and the day on which Germany goes to the polls.

The main issues of concern to German citizens are the refugees, domestic

security, pensions and social injustice. The CDU plans to respond by taking a

more conservative stance. For example, the party is in favour of a ban on the

burka and more systematic deportations to improve internal and external

security.

Conservative stance taken by the CDU could make a coalition more difficult

This stance is likely to make it more difficult for the CDU/CSU to find coalition

partners. Both the SPD and, in particular, the Green Party reject the idea of any

0 10 20 30 40

CDU/CSU

SPD

Greens

Left

AfD

FDP

Others

* Average of major surveys (Allensbach, Infratest Dimap, Forsa, Forschungsgruppe Wahlen, TNS Emnid)

Early December 2016, %

Source: Wahlrecht.de

Popularity of political parties in Germany* 8

55

45

Opportunity Threat

Sources: Bertelsmann Foundation

"Globalisation is a .. "; % of respondents

Attitude towards globalisation in Europe 9

Outlook 2017


further restrictions as far as refugee policy is concerned. The CDU’s tax policy

plans, which, in principle, rule out any tax increases for the next legislative

period, are also scarcely in line with the concepts put forward by the SPD or the

Greens. Based on the information released to date, both parties are calling for

higher tax on high incomes, inheritance and wealth. Naturally, this was also the

case back in 2013 and ultimately did not stand in the way of a coalition with the

SPD.

The established parties are also conducting the election campaign with an eye

on the AfD. If the AfD were to make greater gains, bringing its share of the vote

to markedly above the 10% mark, particularly by taking the votes of CDU/CSU

voters away, another grand coalition would be more likely. However, the AfD

appears to have reached its peak, which is likely due to the fact that the number

of newly registered refugees has been stable, at around 16,400 a month on

average, since April 2016. In case of a renewed surge in the number of

refugees, an ongoing threat to the internal security or critical developments in

the EU or the euro area the AfD could soon (re)gain (even) more support.

EU: Challenging agenda irrespective of national elections

At European level, the 2017 agenda will likely be dominated by elections in two

– or perhaps even three – other key partner countries, and by the management

of a number of difficult issues, in particular Brexit, collaboration between the EU-

27 and in the euro area, and the refugee crisis. Elections will be held in the

Netherlands in March, in France in April/May and possibly also in Italy in the

course of the year. There are substantial concerns regarding the influence of

eurosceptic, populist parties in these countries. Donald Trump’s electoral victory

in the USA could further embolden nationalism in Europe, spurring on the trend

towards fragmentation and making consistent problem management within the

EU more difficult.

Brexit – a Herculean task

Preparations for the Brexit negotiations are already underway. Hopes that the

timetable for Brexit could be clarified early on have, however, been shattered,

because the British High Court is still to decide whether the UK government can

trigger Article 50 of the EU Treaty without parliament first issuing its consent, or

even passing a corresponding act. Nevertheless, we believe that the triggering

of Article 50 by the end of the first quarter of 2017 is the most likely scenario.

This means that the European Council will have to make a decision on the

European Commission’s negotiation mandate in the midst of the mentioned

national elections.

At the moment, the EU-27 remains resolute in its stance that the UK can only

maintain access to the EU internal market if it accepts all four EU freedoms,

makes certain financing contributions and accepts the European Court of

Justice as the dispute resolution institution. Obviously, negotiations are always

dynamic and the final outcome may vary considerably from the original positions

– as long as both sides feel that the final document protects their main interests.

Difficult day-to-day business will keep the EU on its toes

In addition to Brexit, the EU also has other politically sensitive and economically

important issues to tackle, including, first and foremost, migration and the

agreement between the EU and Turkey. Together with the closure of the

Balkans route, the agreement has proved sufficiently effective to date. Turkey

has taken measures to prevent migrants from entering Greece illegally in return

0 20 40 60 80 100

vote for EU exit

want more EU integration

trust politicians

are satisfied with democracy

think country has too many foreigners


Of those respondents that see globalisation as a threat, %

Political attitude to stance on globalisation in EU I 10

0 50 100

vote for remain in EU

want more EU integration

trust politicians

are satisfied with democracy

think country has too many foreigners


Of those respondents that see globalisation as an opportunity, %

Political attitude to stance on globalisation in EU II 11

Outlook 2017


for financial support from the EU (EUR 3 bn has been granted to date, with

another EUR 3 bn envisaged).

Turkey, however, is likely to be more interested in the EU’s pledge to abolish the

visa requirement for Turkish citizens if the country meets a number of

conditions. Since these conditions have not yet been met, the liberalisation of

the visa rules is still hanging in the balance. Despite harsher rhetoric from both

Turkey and the EU, and in particular from the European Parliament, and despite

ongoing tension, both sides are likely to see the continuation of the agreement

as an advantage.

The second issue, trade, relates to key issues that will likely reveal the extent to

which the EU can mend rifts between the member states and what stance it

wants to take towards external partners. These issues range from the

acceptance of the Commission’s proposals for dealing with imports from China

in connection with future anti-dumping investigations, to the pending free trade

agreements (ratification of CETA) and more general aspects relating to free

trade and the open markets policy with regard to the new US government.

Debate on the mix of monetary and fiscal policy in the EMU area

The third key issue relates to an appropriate mix of monetary and fiscal policy

measures and further steps towards political coordination within the euro zone.

Recently, the European Commission has, for the first time, issued a

recommendation for a certain positive fiscal course within the euro zone. It

recommended additional impetus corresponding to 0.5% of GDP, which would

come primarily from countries with healthy state finances. The German Federal

Minister of Finance Schäuble, however, has rejected the proposal as

overstepping the Commission’s remit. The Eurogroup also emphasised that

structuring appropriate fiscal policy lay in the individual and joint sphere of

responsibility of the member states, pointing to the differences in national fiscal

leeway and consolidation measures.

Finally, the relationship with Russia, including the sanctions, is also on the EU’s

agenda. Changes of government in some countries could result in a more

accommodative stance in this respect. The conservative French presidential

candidate, François Fillon, for example, has spoken out in favour of a return to

normal relations with Russia.

This shows that the outcome of the elections will play a key role in shaping

further developments within the EU. In Germany, the other partner countries that

are set to hold elections, and also in the EU-27 as a whole regarding Brexit, as

well as in the UK, 2017 will see key decisions being made that will shape the

next decade and well beyond.

ECB: QE will remain in place until the end of 2017

At its meeting in December, the European Central Bank (ECB) extended its

bond purchase programme (QE) beyond the previous minimum period, which

would have ended in March 2017. It plans to buy bonds at least up until the end

of 2017 in order to sustain the support for the economy from its expansionary

monetary policy. From April onwards, however, the monthly volume is to be

reduced from EUR 80 billion to EUR 60 billion, with the ECB citing the marked

decline in the risk of deflation as its motivation for this decision. At the press

conference, ECB President Mario Draghi did, however, emphasize that

downside risks continue to dominate the economic outlook and that the

purchase programme could be extended and/or expanded at any time if need

be.

0

50000

100000

150000

200000

Asylum applications Refugees

* Preliminary registrations that may include double count

Sources: BAMF, BMI

Asylum applications and refugees registered in the EASY system* 12

0

50000

100000

150000

200000

GR IT

Source: UNHCR

Refugees in Greece and Italy arriving via the Mediterranean 13

0

500

1000

1500

2000

2500

3000

3500

4000

4500

5000

07 08 09 10 11 12 13 14 15 16 17

ECB balance sheet climbs to new highs 14

ECB total assets, EUR bn

Sources: Deutsche Bank Research, ECB

Projected EUR 80 bn asset purchases per month until March 2017 then EUR 60 bn

Outlook 2017


Compared with the fairly optimistic forecasts of the Central Bank, we believe

that there are downside risks associated with growth, in particular. Our GDP

growth forecast for the euro area in 2017 is almost half a percentage point lower

than the ECB’s. This is compounded by the fact that inflation is increasing due

to higher energy prices in particular, whereas core inflation shows little sign of

increasing to date. This is not likely to happen until the labour market achieves

higher capacity utilisation. It should, however, be possible to whittle the bond

purchase programme down further at the end of 2017 if none of the many

economic and political risks materialise. This is likely to become the topic of

debate again in the second half of 2017 anyway, because the ECB is expected

to find it increasingly difficult to find sufficient bonds on the financial market that

meet its criteria.

All in all, however, the exit from the current extreme monetary policy is likely to

be a very long and drawn-out process with a number of stops for breath along

the way, as the example set by the US Fed has shown. As a result, the ECB’s

key rate is unlikely to shift away from the current 0% mark in the foreseeable

future. This means that short-term market rates are likely to remain low in the

euro area. By contrast, the yields on bonds with longer maturities could show

more of a reaction to the increase in yields in the USA, even if the ECB’s

ongoing bond purchases are also likely to keep yields on (German) government

bonds at a low level especially in a historical comparison. This should benefit

the US dollar, which will gain ground against the EUR.

The outlook in detail

Private consumption: oil dampens but solid labour market and migration are

supportive

Private consumption growth will probably slow down to 1.2% in 2017 (2016F:

1.9%) but is still likely to constitute the main growth driver. It made up just over

half of average GDP growth of 1.7% between 2014 and 2016. This was due to

the favourable interplay between the oil price drop, high employment growth

related to migration and solid wage increases.

The German labour market continued its positive performance in 2016. The

number of people in employment rose by 1.0% to a record number of around

43.5 million, while the unemployment rate declined to 6.1%, the lowest level

since reunification. The rise in employment continues to be driven primarily by

migrant entry into the German labour market. Migration of workers, especially

from Eastern Europe, is thus a significant factor in German economic growth

and has eased the labour shortages persisting in some areas. Approximately

60% of the 1% rise in employment in 2016 was likely the result of migration.

Around ¼ of the 1.9% GDP growth in 2016 was due to migration according to

our crude estimation.2

Early indicators signal sustained high demand for labour in the short term and our

overall solid economic forecast can also be expected to buoy high demand for

labour for the medium term as well. The number of job vacancies currently stands at

2 We have taken into account the typically lower level of productivity and the lower average number

of working hours of migrants compared to Germans. Federal Statistical Office census data was

used to roughly estimate the number of working hours and productivity of migrants compared to

Germans. The negative difference in wage of the younger cohort was used as a rough

approximation for the decline in productivity, indicating a wage gap of 25%. Foreigners work

around 5% fewer hours due to the different employment structure. See also Bräuninger, D.,

Peters, H. (2014). Temporary immigration boom: A wake-up call for politicians? , Standpunkt

Deutschland. 28 July 2014. Deutsche Bank Research. Bräuninger, D., Peters, H., Schneider, S.

(2015). Influx of refugees: An opportunity for Germany, Standpunkt Deutschland. 3 November

2015. Deutsche Bank Research.

0.5

1

1.5

2

2.5

3 0.95

1

1.05

1.1

1.15

1.2

1.25

15 16

EUR in USD (left)

US-German yield differential (right, inverted)

Sources: Deutsche Bank Research, Global Insight

%-pts. difference between US and German 5Y govenment bond yields (right)

Rising US interest rates strengthen USD 15

0

10

20

30

40

50

60

70

80

90

100

00 02 04 06 08 10 12 14 16

Germany East West

Job vacancy duration in days

Sources: Federal Employment Agency, Deutsche Bank Research

Filling open positions becomes more difficult 16

Outlook 2017


almost 1 million (+9% yoy), with the time to fill a vacant position standing at a record

of 97 days. Employment is set to increase further, driven by migration. The number

of persons in employment should increase by around ½% or some 230,000 workers

in 2017. However, we also expect a simultaneous increase in the unemployment

rate to 6.2%, as an increasing number of refugees are permitted to register as

unemployed after completing skills acquisition and language courses.

Real wage growth is set to slow in 2017. We expect to see nominal wages grow

at a moderate rate to about 2 ½%. Around half of the increase in wages

governed by collective bargaining agreements relates to agreements concluded

in 2016, which set out a rise of somewhat more than 2%. The following

bargaining rounds can be expected to have the largest impact on wages

governed by collective bargaining agreements in 2017: public sector (federal

states), retail, wholesale, foreign trade and the metals and electronics sectors.

The 4% increase in the minimum wage from EUR 8.50 to EUR 8.84 per hour

with effect from 1 January 2017 will also support wage growth. The rise in

inflation – particularly driven by the oil price – from 0.5% to 1.6% that we expect

in 2017 overcompensates the strong nominal wage growth, meaning real wage

growth is likely to decelerate from the exceptionally high level of the last two

years.

Public finances: Surpluses continue

Germany can expect to achieve a positive budget balance of close to EUR 20

billion or 0.5% of GDP (after 0.7% in 2015) also in 2016. The high surplus

continues to be based on healthy tax revenue streams (~4% yoy) thanks to high

domestic momentum. Income tax revenue rose by around 10%; while

corporation tax revenue increased even more, by over 30%. Despite the latest

rise in capital market interest rates, the interest burden is likely to have declined

further as well. We estimate those savings to have amounted to several billion

EUR in 2016. The surplus would have been even higher if social security

benefits had not risen by 2 ½% compared to 2015. The rising trend in social

security expenditure, which has increased by 15% since 2011, thus persists,

despite low rates of unemployment and record employment. The higher costs of

refugee care also increased spending in 2016, with the lion's share of expenses

incurred at state and local levels. For example, federal state expenditure for

municipalities to tackle the refugee crisis rose by close to EUR 3 billion,

according to the Deutsche Bundesbank, with the federal states receiving a

similar amount of federal budget funds.

Despite the somewhat subdued growth momentum in 2017 (rise in numbers of

employed and GDP growth 0.5% and 1%; 2016 1% and 1.9%), a similar level of

nominal growth to 2016 can be expected due to rising inflation. Moreover the

reserves in the federal budget from previous years may offset somewhat less

dramatic growth in tax revenues in 2017, meaning we expect a positive budget

balance of 0.5% for 2017 too. Although the costs of tackling the refugee crisis

are set to decline, a rise in social security and personnel expenditure due to a

renewed surge in refugee arrivals remains the greatest fiscal risk in 2017. The

budget balance forecast together with nominal GDP growth of around 2% is

likely to further reduce government debt, which has already fallen from more

than 80% to the current 70% over the last few years. If this trend continues, the

debt ceiling of 60% of GDP stipulated in the Maastricht Treaty will be reached

before the end of the decade. This projection already takes into account the

likely implementation of a tax reform benefitting small and medium-sized

incomes after the German parliamentary election and thus lower surpluses after

2017.

0

50

100

150

200

250

300

12 13 14 15 16

EU-8

EU-2

Croatia

GIPS

Balkans

East European third countries

Non-European Asylum Country of Origin

Change yoy ('000 persons)

Sources: Federal Employment Agency, Deutsche Bank Research

Rise in employment driven by migration remains at a high level 17

50

60

70

80

90

00 05 10 15 20

Public debt level 18

Sources: Bundesbank, Deutsche Bank Research

% of GDP

0

10

20

30

40

Income tax Corporate tax

% yoy, Q1-Q3 2016 vs. Q1-Q3 2015

Source: Bundesbank

Profit-related taxes 2016 19

Outlook 2017


Construction: Trend reversal in commercial construction

Construction investment recorded a year-on-year increase of almost 3% in

2016, with housing construction increasing by around 4% and still dominating

investment activity. The excess demand – a shortage of up to 1 million homes in

metropolitan areas and major cities – is likely to remain the key issue in the

construction industry well beyond 2017. Lack of land for construction and

capacity restrictions remain the biggest hindrances to construction activity.

Additional momentum can, however, be expected for 2017, given the

considerable increase in new orders (2016: +15%) and planning permissions

granted (2016: +14%). Building codes and environmental regulations could also

be eased, as new housing is urgently needed due to the population increase of

around 1.5 million as a result of high migration levels over the past two years.

We therefore expect housing investment to rise by close to 5%. This could

initially raise the number of homes completed to 300,000. Assuming a need for

at least 350,000 homes, the excess demand would nevertheless increase.

House prices also continued to rise significantly in 2016 buoyed by high excess

demand. They rose, as anticipated, by an average of 5-7%, while apartment

prices saw a 7-8% increase, according to BulwienGesa (126 towns and cities).

As in recent years, price momentum in metropolitan areas and major cities was

the highest, although even many smaller towns saw price increases; no price

declines were reported in any of the 126 towns and cities. Prices now stand at

their historical average and have thus concluded normalisation based on OECD

affordability indicators, price-to-income and price-to-rent ratios. The price boom

is also reflected in rent momentum. Prices for new lets rose by 4 ½%, while

those for relets rose by more than 4 ¾% in 2016. This is the heftiest rise since

1994, despite the introduction of the rent ceiling in 2015.

Prices are expected to rise again in 2017 given the fact that the shortage

continues to grow. This therefore represents the beginning of the overvaluation

phase, which price momentum could dampen a little. Moreover, the latest capital

market interest rate increase of nearly 0.5 percentage points could enable

mortgage rates to climb back towards 2% (currently 1.5%). However, since it will

take many years to reduce the housing shortage, the risk of a real estate bubble

in the current cycle remains high.

Commercial construction is likely to face a trend reversal in 2017. The

proportion of vacancies has declined heavily in many towns and cities. The

number of office employees has grown by around 2% p.a. in recent years

thanks to positive domestic demand developments. Moreover, the dramatic rise

in new orders and planning permissions indicate recovery, which is why we

anticipate growth of over 1% (after almost -6% from 2012 to 2016). In spite of

the fact that the decline in the vacancy rate can be expected to continue, the

investment momentum in commercial construction may also be sustained in

2017. After a 3% growth spike in 2016, public construction investment is likely to

increase again. New orders and planning permissions in this area, particularly

for road construction, increased significantly at the beginning of 2016. However,

new orders have been on the decline again since. Moreover, public construction

has been somewhat sluggish overall in the last five years, which is why we

forecast an increase of just ½% in 2017, on the heels of a strong 2016.

Net trade burden on growth in 2017 – recovery not likely until 2nd half 2017

German export performance was ill-fated in 2016. Demand from abroad –

approximated by GDP growth weighted by the relevant export market share –

declined somewhat year on year, and exchange rate movements were

unfavourable for German exporters. The weaker demand from the non-EMU

industrialised countries and emerging markets also served to dampen German

-5

0

5

10

12 13 14 15 16 17

Residential construction

Commercial construction

Gross fixed capital formation in construction 20

% yoy


75

100

125

150

175

200

05 07 10 13 16

Residential construction

Commercial construction

Public construction

New orders 21

2010=100, swda


-3

0

3

6

9

00 04 08 12 16

Residential real estate prices

Rents, new

Rents, exisiting

Germany: Residential properties 22

% yoy

Sources: BulwienGesa, Deutsche Bank Research

Outlook 2017


export growth. However, relatively solid demand from the euro area had a

stabilising effect. Exports to the USA, Germany's largest export market with a

share of around 9%, performed poorly (Jan/Sept 2016: -6% yoy). Exports to

Emerging Markets declined dramatically in some cases, as the low price of oil

and/or political challenges put some countries under considerable pressure

(exports to Saudi Arabia Jan/Sept 2016: -26% yoy; Brazil: -17%). Exports to

Italy (+6%), Poland (+5%) and, despite slowing GDP growth, China (+4%) were

the largest contributors to growth.

Sentiment indicators for exports are providing mixed signals at present. While

the Purchasing Managers' Indices paint a very positive picture for the next few

months, ifo export expectations recently fell significantly, but were only slightly

below the long-term average. The global economy, still expected to be weak

overall in the first half of the year, and the numerous sources of political

uncertainty are likely to cause businesses there to postpone investments. This

would affect the foreign EMU markets in particular. An emerging US upturn

could lend the global economy some momentum from the second half of 2017,

meaning that German exports will see relatively weak annual average growth

year on year in 2017 (1.8%), and then climb much higher in 2018 (3.7%). This

assumes that the new US government under President Trump does not

introduce any trade restrictions. The higher oil prices are also likely to calm the

situation in the producing countries. Another factor is that our FX strategists

predict a much weaker EUR compared to the main trading partner currencies.

Imports are likely to increase more than exports given the overall solid

performance of the domestic German economy expected during the forecast

period. As a result, it is probable that net exports will weaken GDP growth for

2016 and 2017 (-0.2 pp each year), with the effect neutral in 2018.

The German current account surplus is set to climb to an all-time high of 8.8% of

GDP in 2016. The substantial increase since 2013 can, however, be almost

completely explained by the oil price-related decline in spending on oil imports.

The tentative recovery of the oil price is therefore likely to mean that the surplus

will fall to 8.2% in 2017. In the medium term, the current account surplus can be

expected to fall to 7% of GDP in 2020 as a result of the unfavourable

demographic developments, the persisting real estate boom and significantly

reduced momentum of globalisation.3

Declining machinery and equipment investments in 2017

The environment for investment in machinery and equipment remains very

subdued in light of the restrained outlook for German exports in the short term

and the high level of (political) uncertainty. Although capacity utilisation is

currently around 2 ½% above the long-term average, this is unlikely to be

enough to substantially increase expansion investments, given the risks.

Replacement investments can be expected to continue to be made by the

majority.

The brighter prospects for exports from the second half of 2017 will likely mean

that investments in machinery and equipment gradually gains momentum. Our

forecast for investments in machinery and equipment in 2017 is not as weak as

it may appear at first glance, as the negative statistical carry-over effect from

2016 per se implies a decline of 1.6%. A slight increase in investments in

machinery and equipment is predicted in the course of 2017 (Q4 vs. Q1:

+0.7%). We expect investments in machinery and equipment to expand by

almost 2 ½% in 2018.

3 Peters, H., Winkler, R. (2016). Germany's massive CA surplus set to decline. Current Issues. 26

August 2016. Deutsche Bank Research.

-4

-2

0

2

4

6

8

10

12

12 13 14 15 16

Advanced Economies ex EMU

Emerging Markets

EMU

Total

% yoy, pp,12MMA

Sources: Eurostat, Deutsche Bank Research

Slowdown in German export growth 23

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

-30 -25 -20 -15 -10 -5 0 5

10 15 20 25 30

10 11 12 13 14 15 16 17

Nominal global trade (left)

German merchandise exports (left)

PMI new exp. orders (lagged 3M, r.)

ifo export exp. (lagged 3M, r.)

% 3M mov avg yoy (left), Standardized values (right)

Sources: Deutsche Bundesbank, ifo, Markit, CPB, Deutsche Bank Research

Mixed outlook for German exports in the coming months 24

50

60

70

80

90

100

07 08 09 10 11 12 13 14 15 16

Capacity utilisation, sa

Average since 1992

Capacity utilisation in German manufacturing, %

Source: ifo

Capacity utilisation slightly above multi-year average 25

Outlook 2017


Slight production growth for German industry in 2017

Production in Germany's manufacturing sector is likely to have increased by

around 1% in 2016 in real terms. This therefore more or less maintained the

result from 2015 (+1.1%). The period of relatively low cyclical fluctuations in

German industry experienced since 2012 also continued in 2016. There were no

major spikes in the production results of the large industrial sectors either in

2016. Domestic production rose by slightly above the average, including in the

automotive, pharmaceutical and plastics sectors. In contrast, the chemicals

sector, metal production and mechanical engineering fared slightly less well

than the manufacturing sector as a whole.

Germany's manufacturing sector is likely to only slightly boost production in

2017 as well. We expect real growth of 0.5%, as the persistent weakness in

global trade outlined in this report indicates. In addition, there is low momentum

in gross fixed capital formation in machinery and equipment, both in Germany

and in key export markets. In such an environment, the stimulus in demand in

the export-intensive German industrial sectors with a focus on capital goods is

unlikely to be strong enough to generate a marked increase in production. This

is true, for instance, for the mechanical engineering and large parts of the

electrical engineering sectors. Demand for cars in key automobile markets is

unlikely to grow as strongly in 2017 as in 2016 (China), or is likely to stagnate at

a high level (USA) or decline significantly (UK). Continental Europe's demand

for cars, however, is likely to continue to recover.

Moreover, we do not believe German industry to be at an excessively high risk

of recession. For one thing, business, production and export expectations in the

manufacturing sector were in positive territory at the end of 2016. For another,

capacity utilisation in the third and fourth quarters of 2016 increased twice in a

row. Current figures indicate that there has been quite positive trending in new

orders as well.

Key commodity prices are likely to be higher in 2017 than in 2016.

Consequently, national economies with “business models” strongly based on

commodity exports will fare better economically than in 2015 and 2016. Such

countries' demand for German products could thus increase again somewhat,

however in most cases only slightly.

As we anticipate rather weak global trade for 2018 as well, and investment

activity in many places still remains feeble, German industrial production can

again expect to see a gain of around 1% at best. We expect employment to

move more or less sideways, albeit at a high level, for the next several months.

Barbara Böttcher (+49 69 910-31787, [email protected])

Eric Heymann (+49 69 910-31730, [email protected])

Jochen Möbert (+49 69 910-31727, [email protected])

Heiko Peters (+49 69 910-21548, [email protected])

Oliver Rakau (+49 69 910-31875, [email protected])

105

107

109

111

113

115

117

14 15 16

Production Orders

Manufacturing in Germany, 2010=100, sa

Source: Federal Statistical Office

Strong growth in orders based on current data 26

Outlook 2017


Economic forecasts DX

Real GDP

Consumer Prices*

Current Account

Fiscal Balance

(% growth)

(% growth)

(% of GDP)

(% of GDP)

2016F 2017F 2018F

2016F 2017F 2018F

2016F 2017F 2018F

2016F 2017F 2018F

Euroland 1.7 1.3 1.5

0.2 1.4 1.5

2.9 2.8 2.5

-1.8 -1.5 -1.5

Germany 1.9 1.1 1.5

0.5 1.6 1.6

8.8 8.2 7.8

0.5 0.5 0.2

France 1.2 1.3 1.1

0.3 1.2 1.3

-0.5 -0.3 -0.1

-3.2 -3.2 -3.1

Italy 0.9 0.7 0.7

-0.1 1.0 1.2

2.9 2.7 2.3

-2.3 -2.3 -2.3

Spain 3.3 2.5 2.2

-0.4 1.7 1.7

1.9 1.7 1.7

-4.4 -3.2 -2.8

Netherlands 2.1 2.1 1.5

0.1 1.0 1.2

10.5 10.2 10.2

-1.1 -0.7 -0.5

Belgium 1.2 1.1 1.3

1.8 2.0 1.8

1.0 1.0 1.0

-3.0 -2.5 -2.6

Austria 1.3 1.5 1.6

1.0 1.8 1.6

2.6 2.8 3.1

-1.4 -1.2 -1.0

Finland 1.5 1.2 1.5

0.4 1.3 1.4

-0.6 -0.4 -0.3

-2.3 -2.2 -1.7

Greece 0.3 1.4 1.6

0.2 1.3 1.0

1.0 1.2 1.5

-3.7 -2.4 -2.2

Portugal 1.2 1.2 1.1

0.7 1.4 1.5

0.5 0.7 0.7

-2.8 -2.5 -2.5

Ireland 3.3 2.8 3.0

-0.1 1.1 1.4

12.0 10.0 8.0

-1.1 -1.1 -1.0

UK 2.1 1.2 1.1

0.6 2.3 2.7

-5.2 -4.8 -4.0

-3.3 -2.9 -2.5

Denmark 1.0 1.7 1.8

0.2 1.1 1.4

6.5 6.5 6.5

-2.1 -2.5 -1.9

Norway 0.7 1.6 1.8

3.6 2.7 2.5

4.4 6.2 7.0

3.7 3.9 4.2

Sweden 3.2 2.0 2.3

1.0 1.7 1.9

4.6 4.2 4.4

0.1 -0.2 0.0

Switzerland 1.4 1.5 1.7

-0.3 0.5 0.7

9.5 9.3 9.0

-0.1 -0.1 -0.1

Czech Republic 2.3 2.6 2.7

0.6 1.6 2.2

2.1 1.1 0.7

-0.4 -0.8 -0.7

Hungary 2.2 2.6 2.7

0.4 2.0 2.8

5.6 4.6 4.2

-1.8 -2.6 -2.2

Poland 2.8 3.2 3.4

-0.6 1.4 1.7

-0.5 -1.2 -1.5

-2.6 -3.0 -2.9

United States 1.5 2.3 3.5

1.2 1.9 2.2

-2.8 -3.4 -2.8

-3.2 -3.1 -2.5

Japan 0.7 1.0 1.2

-0.3 0.5 1.1

3.9 3.9 3.7

-3.7 -3.6 -3.2

China 6.7 6.5 6.0

2.0 2.5 2.6

2.4 2.1 1.8

-4.0 -4.0 -4.0

World 3.0 3.4 3.8

4.3 5.3 4.5

*Consumer price data for European countries based on harmonized price indices except for Germany. This can lead to discrepancies compared to other DB publications.

Sources: National Authorities, Deutsche Bank

Forecasts: German GDP growth by components, % qoq, annual data % yoy DX

2016

2017

2014 2015 2016F 2017F 2018F

Q1 Q2 Q3 Q4F

Q1F Q2F Q3F Q4F

Real GDP 1.6 1.7 1.9 1.1 1.5

0.7 0.4 0.2 0.5

0.4 0.3 0.4 0.4

Private consumption 0.9 2.0 1.9 1.2 1.4

0.6 0.2 0.4 0.4

0.3 0.3 0.4 0.3

Gov't expenditure 1.2 2.8 4.4 2.2 1.0

1.1 1.2 1.0 1.1

0.3 0.3 0.3 0.3

Fixed investment 3.4 1.7 2.2 0.9 2.4

1.6 -1.6 0.0 0.5

0.7 0.4 0.4 0.6

Investment in M&E 5.5 3.7 0.7 -1.5 2.4

1.1 -2.3 -0.6 -1.0

0.5 0.2 0.3 0.2

Construction 1.9 0.3 2.7 2.2 2.8

2.3 -1.9 0.3 1.8

1.1 0.5 0.5 0.9

Inventories, pp -0.3 -0.5 -0.3 -0.1 0.0

-0.2 -0.2 0.0 0.0

0.0 0.0 0.0 0.0

Exports 4.1 5.2 2.2 1.8 3.7

1.4 1.2 -0.4 0.4

0.6 0.8 1.1 1.0

Imports 4.0 5.5 3.0 2.5 4.2

1.5 0.1 0.2 0.6

0.7 0.9 1.3 1.1

Net exports, pp 0.4 0.3 -0.2 -0.2 0.0

0.0 0.6 -0.3 -0.1

0.0 0.0 0.0 0.0

Consumer prices* 0.9 0.2 0.5 1.6 1.6

0.3 0.1 0.5 1.1

2.5 1.4 1.3 1.1

Unemployment rate, % 6.7 6.4 6.1 6.2 6.6

6.2 6.1 6.1 6.0

6.1 6.2 6.3 6.4

Industrial production 1.5 0.5 1.3 0.8 1.2

Budget balance, % GDP 0.3 0.7 0.5 0.5 0.2

Public debt, % GDP 74.9 71.2 68.2 65.9 63.5

Balance on current account, % GDP 7.3 8.5 8.8 8.2 7.8

Balance on current account, EUR bn 213 256 275 265 259

*Inflation data for Germany based on national definition. This can lead to discrepancies to other DB publications.

Sources: Federal Statistical Office, German Bundesbank, Federal Employment Agency, Deutsche Bank Research

Outlook 2017


DB German Macro Surprise Index

The DB German Macro Surprise Index compares published economic data with market forecasts and thus

provides clues as to the direction of future forecast revisions.4


4 See for details Focus Germany. August 4, 2014.

Last 20 published economic data for Germany DX

Bloomberg Tickers IndicatorReporting

month

Publication

dateCurrent value

Bloomberg

consensusSurprise

Standardised

surprise

Quantile

rank

GRCAEU Index Current Account Balance (EUR bn) 9 2016 08/11/16 24.4 24.5 -0.1 -0.4 0.3

GRIPIMOM Index Industrial production (% mom) 9 2016 08/11/16 -1.6 -0.5 -1.1 -0.9 0.2

GRCP20YY Index CPI (% yoy) 10 2016 11/11/16 0.8 0.8 0.0 0.2 0.3

GRZEWI Index ZEW Survey Expectations 11 2016 15/11/16 13.8 8.1 5.7 0.7 0.8

GRZECURR Index ZEW Survey Current Situation 11 2016 15/11/16 58.8 61.6 -2.8 -0.5 0.2

GRIFPBUS Index IFO Business Climate 11 2016 24/11/16 110.4 110.5 -0.1 -0.2 0.4

GRGDPPGQ Index GDP (% qoq) 9 2016 24/11/16 0.2 0.2 0.0 -0.1 0.3

GRIMP95Y Index Import Price Index (% yoy) 10 2016 29/11/16 -0.6 -0.8 0.2 0.5 0.8

GRFRIAMM Index Retail Sales (% mom) 10 2016 30/11/16 2.4 1.0 1.4 1.4 0.9

GRUECHNG Index Unemployment Change (000's mom) 11 2016 30/11/16 -5.0 -5.0 0.0 -0.2 0.4

MPMIDEMA Index Markit Manufacturing PMI 11 2016 01/12/16 54.3 54.4 -0.1 -0.1 0.3

MPMIDESA Index Markit Services PMI 11 2016 05/12/16 55.1 55.0 0.1 0.1 0.6

GRIORTMM Index Factory Orders (% mom) 10 2016 06/12/16 4.9 0.6 4.3 2.0 1.0

GRIPIMOM Index Industrial production (% mom) 10 2016 07/12/16 0.3 0.8 -0.5 -0.4 0.3

GRCAEU Index Current Account Balance (EUR bn) 10 2016 09/12/16 18.4 22.0 -3.6 -1.4 0.1

GRZECURR Index ZEW Survey Current Situation 12 2016 13/12/16 63.5 59.0 4.5 0.5 0.7

GRCP20YY Index CPI (% yoy) 11 2016 13/12/16 0.8 0.8 0.0 0.2 0.3

GRZEWI Index ZEW Survey Expectations 12 2016 13/12/16 13.8 14.0 -0.2 0.0 0.5

MPMIDESA Index Markit Services PMI 12 2016 15/12/16 53.8 54.9 -1.1 -1.2 0.1

MPMIDEMA Index Markit Manufacturing PMI 12 2016 15/12/16 55.5 54.5 1.0 1.0 0.9

Sources: Bloomberg Finance LP, Deutsche Bank Research

-0.5

-0.4

-0.3

-0.2

-0.1

0.0

0.1

0.2

0.3

0.4

0.5

14 15 16 DB German Macro Surprise Index +/- 1 standard deviation

DB German Macro Surprise Index

Average of last 20 z-scores of data surprises

Values above (below) 0 indicate the data came in better (worse) than expected

Sources: Bloomberg Finance LP, Deutsche Bank Research

https://www.dbresearch.de/PROD/DBR_INTERNET_EN-PROD/PROD0000000000340116/Focus+Germany%3A+Weaker+recovery+in+H2.pdf

Outlook 2017


Export Indicator 2016: demand impact remains weak – price impact turns negative

The Export Indicator identifies the effects on German exports of changes in global demand on the one hand,

and currency movements on the other (price impact).5


5 See for details Focus Germany, March 3, 2016.

https://www.dbresearch.de/PROD/DBR_INTERNET_EN-PROD/PROD0000000000340116/Focus+Germany%3A+Weaker+recovery+in+H2.pdf

Outlook 2017


Dieter Bräuninger (+49 69 910-31708, [email protected])


Oliver Rakau (+49 69 910-31875, [email protected])

Germany: Events of economic-, fiscal- and euro-politics DX

Date Event Remarks

19 Jan ECB Governing Council meeting, press conference Review of the monetary policy stance, given that at its recent meeting the ECB announced a long and slow taper.

23-24 Jan Eurogroup and ECOFIN, Brussels Debates on the economic situation and on proposals for an additional fiscal stimulus.

3 Feb Informal European Council, Malta Head of States and Governments from 27 Member States will debate on the development of an EU 27

20-21 Feb Eurogroup and ECOFIN, Brussels Situation in the euro area.

9 March ECB Governing Council meeting, press conference Review of the monetary policy stance.

9-10 March European Council, Brussels Poss. debate on the implementation of strategies for the Single Market (digital single market, capital market union and energy union).

March EU Heads of states and governments, Rome Meeting to celebrate the 60s anniversary of the Treaty of Rome

15 March Elections in the Netherlands The right-wing PVV is currently the most popular party (~20%), marginally above PM Rutte’s VVD conservatives. Polls suggest a government can be formed without the PVV.

End-March UK government Triggering Art. 50 TEU? We still consider a notification by end-March the most likely scenario.

Source: Deutsche Bank Research

Germany: Data calendar DX

Date Time Data Reporting period DB forecast Last value

30 Dec 2016 8:00 Import prices (Index, sa) pch mom (yoy) November 0.0 (-0.4) 0.9 (-0.6)

3 Jan 2017 14:00 Consumer prices preliminary (Index, sa), pch mom (yoy) December 0.7 (1.7) 0.1 (0.8)

3 Jan 2017 10:00 Unemployment rate (%, sa) October 6.0 6.0

6 Jan 2017 8:00 Retail sales (Index, sa), pch mom December -1.0 2.4

6 Jan 2017 8:00 New orders manufacturing (Index, sa), pch mom November -2.5 4.9

9 Jan 2017 8:00 Industrial production (Index, sa), pch mom November 0.9 0.3

9 Jan 2017 8:00 Trade balance (EUR bn, sa) November 21.6 20.5

9 Jan 2017 8:00 Merchandise exports (EUR bn, sa), pch mom (yoy) November 2.1 (3.0) 0.5 (2.0)

9 Jan 2017 8:00 Merchandise imports (EUR bn, sa), pch mom (yoy) November 1.3 (1.8) 1.3 (1.8)

24 Jan 2016 9:30 Manufacturing PMI (Flash) January - 54.3

24 Jan 2016 9:30 Services PMI (Flash) January - 55.1

14 Feb 2017 8:00 Real GDP (Index, sa), % qoq Q4 2016 0.5 0.2

Sources: Deutsche Bank Research, Federal Statistical Office, Federal Employment Agency, ifo, Markit

Outlook 2017


Financial forecasts DX

US JP EMU GB

CH SE DK NO PL HU CZ

Key interest rate, %

Current 0.625 -0.10 0.00 0.25

-0.75 -0.50 0.05 0.50 1.50 0.90 0.05

Mar 17 0.625 -0.10 0.00 0.25

-0.75 -0.50 0.05 0.50 1.50 0.90 0.05

Jun 17 0.875 -0.10 0.00 0.25

-0.75 -0.50 0.05 0.50 1.50 0.90 0.05

Dec 17 1.125 -0.10 0.00 0.25

-0.75 -0.50 0.05 0.50 1.50 0.90 0.05

3M interest rates, %

Current 0.99 0.06 -0.32 0.37

Mar 17 0.98 0.05 -0.30 0.33

Jun 17 1.23 0.05 -0.30 0.34

Dec 17 1.48 0.05 -0.30 0.35

10J government bonds yields, %

Current 2.62 0.07 0.26 1.42

Mar 17 3.00 0.05 0.20 1.35

Jun 17 3.60 0.05 0.25 1.45

Dec 17 3.10 0.00 0.35 1.60

Exchange rates

EUR/USD USD/JPY EUR/GBP GBP/USD

EUR/CHF EUR/SEK EUR/DKK EUR/NOK EUR/PLN EUR/HUF EUR/CZK

Current 1.04 117.93 0.84 1.23

1.07 9.72 7.43 9.03 4.40 310.98 27.02

Mar 17 1.03 117.00 0.90 1.14

1.06 9.46 7.46 9.08 4.53 316.25 27.00

Jun 17 1.00 120.00 0.89 1.12

1.04 9.39 7.46 9.05 4.51 317.50 27.00

Dec 17 0.95 125.00 0.90 1.06

1.00 9.25 7.46 9.00 4.55 320.00 26.50

Sources: Bloomberg, Deutsche Bank

Outlook 2017


German data monitor DX

Q4 2015

Q1 2016

Q2 2016

Q3 2016

Q4 2016

Jul 2016

Aug 2016

Sep 2016

Oct 2016

Nov 2016

Dec 2016

Business surveys and output

Aggregate

Ifo business climate 108.5 106.8 107.8 108.0

108.3 106.3 109.5 110.4 110.4

Ifo business expectations 104.2 100.7 101.8 102.2

102.1 100.1 104.5 105.9 105.5

Industry

Ifo manufacturing 103.1 100.7 101.9 102.4

102.4 100.8 104.1 105.7 104.8

Headline IP (% pop) -0.4 1.8 -0.8 0.3

-1.5 3.0 -1.6 0.3

Orders (% pop) 0.5 0.7 -0.3 0.6

0.4 0.8 -0.3 4.9

Capacity utilisation 84.4 85.0 84.4 84.8 85.7

Construction

Output (% pop) 3.5 1.4 -5.3 1.9

1.1 1.0 -1.3 1.9

Orders (% pop) 10.0 6.3 -0.1 -5.5

-4.6 -2.2 1.6

Ifo construction 123.1 122.7 124.6 126.9

126.1 126.2 128.4 129.0 129.6

Consumer demand

EC consumer survey -4.4 -6.1 -3.2 -2.5

-2.1 -2.5 -2.9 -2.5 -1.2

Retail sales (% pop) 0.4 0.7 -0.3 0.2

0.5 0.0 -1.5 2.4

New car reg. (% yoy) 5.7 4.5 9.4 4.2

-3.9 8.3 9.4 -5.6 1.5

Foreign sector

Foreign orders (% pop) 0.2 2.1 -1.4 2.6

2.8 -0.2 0.2 3.9

Exports (% pop) -0.9 0.5 0.4 -0.1

-1.6 3.6 -1.0 0.5

Imports (% pop) -1.1 -0.1 -1.2 1.4

0.0 1.9 -0.7 1.3

Net trade (sa EUR bn) 59.6 61.5 65.6 62.3

19.5 21.6 21.1 20.5

Labour market

Unemployment rate (%) 6.3 6.2 6.1 6.1

6.1 6.1 6.1 6.0 6.0

Change in unemployment (k) -24.0 -39.3 -29.3 -19.3

-7.0 -7.0 -1.0 -13.0 -5.0

Employment (% yoy) 1.1 1.2 1.2 0.9

1.0 0.9 0.9 0.8

Ifo employment barometer 109.7 108.4 108.2 109.0

108.1 108.6 110.1 110.7 111.1

Prices, wages and costs

Prices

Harmonised CPI (% yoy) 0.2 0.1 0.0 0.4

0.4 0.3 0.5 0.7

Core HICP (% yoy) 1.2 1.1 1.0 1.1

1.3 1.0 1.1 1.1

Harmonised PPI (% yoy) -2.3 -2.8 -2.6 -1.7

-2.0 -1.6 -1.4 -0.4

Commodities, ex. Energy (% yoy) -12.6 -14.6 -6.5 2.9

0.2 4.1 4.7 9.1 19.3

Oil price (USD) 44.8 35.1 46.9 47.0

46.6 47.1 47.3 51.4 47.1

Inflation expectations

EC household survey 4.0 5.3 3.6 6.2

4.9 7.2 6.4 7.4 11.8

EC industrial survey 1.5 -2.4 1.7 3.0

4.8 1.6 2.7 5.4 6.8

Unit labour cost (% yoy)

Unit labour cost 1.7 2.1 0.4 1.5

Compensation 2.4 2.6 1.9 2.3

Hourly labour costs 1.9 3.8 0.7 2.6

Money (% yoy)

M3 9.3 7.8 7.2 6.6

7.4 7.2 6.6 5.3

M3 trend (3m cma)

7.2 7.1 6.4

Credit - private 2.7 2.0 2.7 2.6

2.0 2.2 2.6 3.0

Credit - public 11.7 -9.1 9.7 -0.1

9.1 9.5 -0.1 4.2

% pop = % change this period over previous period.

Sources: Deutsche Bundesbank, European Commission, Eurostat, Federal Employment Agency, German Federal Statistical Office, HWWI, ifo, Markit

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Beacon of stability: The foundations

of Germany’s success ............................................. December 15, 2016

The dark sides of QE: Backdoor

socialisation, expropriated savers

and asset bubbles ..................................................... November 1, 2016

A darker Europe ............................................................... June 23, 2016

The ECB must change course ........................................... June 8, 2016

Influx of refugees: An opportunity for Germany ...... November 13, 2015

Misguided policy raises risk of housing bubble ................. May 28, 2015

Case for higher investment in infrastructure –

despite questionable ”gap analysis” .......................... December 5, 2014

Temporary immigration boom:

A wake-up call for politicians? ........................................... July 28, 2014

The economics of sanctions:

The West can afford to be tough ....................................... May 16, 2014

Can Hollande pull off a Schröder

and will it work? ......................................................... February 24, 2014

Grand coalition – poor policies ................................ December 16, 2013

Criticism of Germany’s CA surpluses

largely unfounded .................................................... December 12, 2013

Energiewende 2.0 –

don't risk competitiveness ....................................... November 26, 2013

Minimum wage at EUR 8.50:

The wrong policy choice ............................................ November 4, 2013

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