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January 28, 2013
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We expect a recovery to set in approximately in spring this year on the back of a stabilising euro area and more buoyant emerging markets. Owing to the low starting point, however, annual average growth will probably come to no more than 1/4% in 2013. Nonetheless, the labour market is expected to remain relatively stable. With oil prices forecast to stabilise, consumer prices will probably rise less strongly this year. Public-sector budgets look set to deteriorate for cyclical reasons in 2013. However, with a deficit of only about 1/2% of GDP, Germany would still be in an excellent position by international standards. [more]
Focus Germany: Gradual improvement in 2013 Current Issues Business cycle The German economy coped well with the difficult environment in 2012. Despite the deep recession in the southern peripheral countries of the euro area, the noticeable slowdown in economic growth in the emerging markets and the uncertainty surrounding the sovereign debt crisis, Germany's economy expanded by 0.7% last year. However, growth dynamics weakened substantially in the course of 2012 and economic output presumably even shrank by 0.5% in Q4, which shows that Germany was unable to fully decouple from the develop- ments in its neighbouring countries. We expect a recovery to set in approximately in spring this year on the back of a stabilising euro area and more buoyant emerging markets. The third con- secutive rise in the ifo index in January signalling somewhat more positive sentiment in Germany is in line with that. Owing to the low starting point, however, annual average growth will probably come to no more than ¼% in 2013. Nonetheless, the labour market is expected to remain relatively stable. With oil prices forecast to stabilise, consumer prices will probably rise less strongly this year. Public-sector budgets look set to deteriorate for cyclical reasons in 2013. However, with a deficit of only about ½% of GDP, Germany would still be in an excellent position by international standards. Author Bernhard Gräf +49 69 910-31738 bernhard.graef@db.com Editor Stefan Schneider Deutsche Bank AG DB Research Frankfurt am Main Germany E-mail: marketing.dbr@db.com Fax: +49 69 910-31877 www.dbresearch.com DB Research Management Ralf Hoffmann | Bernhard Speyer Content Page Gradual improvement in 2013 .........................1 Forecast tables ............................................. 12 Chart of the month ........................................ 13 Chartbook: Business cycle ............................ 14 Chartbook: Sectors ....................................... 17 Chartbook: Financial markets ....................... 18 Chartbook: Economic policy .......................... 23 Event calendar .............................................. 24 Data calendar ............................................... 25 Financial forecasts ........................................ 25 Data monitor ................................................. 26 January 28, 2013 Focus Germany Gradual improvement in 2013 - 5 - 4 - 3 - 2 - 1 0 1 2 3 91 95 99 03 07 11 3 consecutive increases 3 consecutive decreases industrial production ifo business climate All normalised values: workday adjusted industrial production, % yoy; ifo business climate, 2005=100 Sources: ifo, Federal Statistical Office, DB Research Third increase in ifo index suggests cyclical turning point DX Focus Germany 2 | January 28, 2013 Current Issues German economy successful in difficult environment ... The German economy is well positioned and highly competitive, and its export sector is geared to the right products and countries to benefit strongly from global growth impulses. Moreover, household, corporate and public-sector finances are in good shape. This explains why Germany has boasted consider- ably stronger growth than its neighbours since the outbreak of the sovereign debt crisis and has already more than offset the slump of 2009. Between 2010 and 2012, Germany's economy expanded by more than 2 ½% per annum, and output already exceeds pre-crisis levels by a good 2%. By contrast, the econo- mies of the other members of the European Monetary Union (EMU) virtually stagnated during the same period, and their real gross domestic product (GDP) is more than 4% lower on average than prior to the crisis. ... but not immune to recession in EMU countries True, the German economy has managed to hold its own in an increasingly adverse environment. But it is not immune to the deep recession in the southern peripheral countries of EMU or the stagnation in France, its most important sales market which still absorbs almost 10% of its exports. All in all, almost 40% of German exports go to the euro-area member states. Order intake from these countries has been declining since the end of 2011, most recently at double- digit rates. Correspondingly, German exports to EMU have been shrinking for several months now. As this was offset only in part by stronger exports to Asia and especially the US, German export growth decelerated in the course of 2012. Markedly weaker growth dynamics in 2012 Investment, which was already weighed down by growing uncertainty surround- ing the sovereign debt crisis, took an additional beating from weaker exports. Investment in plant and equipment, for instance, had been declining since Q4 2011 and was down considerably from its pre-year level at the end of 2012. Even though private consumption rose moderately and compensated weaker investment, it could not also outweigh the negative impulse from slowing exports. As a result, growth dynamics weakened noticeably in the course of 2012, and real GDP even shrank by 0.5% in last year's final quarter. Thanks to strong H1 growth, however, German economic output nonetheless grew by 0.7% on an annual average in 2012. Global environment somewhat brighter in 2013 Although it is hardly reflected in annual average growth rates we nonetheless forecast an appreciable economic recovery during the current year. We expect the global economy to grow only slightly faster, at 3.2%, than in 2012, the US economy even somewhat more slowly at 2% (following 2.3% in 2012) and the euro-area economy to shrink even further, by -0.3%, this year (after -0.5% last year). We therefore assume that most euro-area countries will reach their cyclical low in Q1 2013 and swing onto a moderate growth path afterwards. In the US as well as the emerging markets, growth looks set to pick up in the course of the year. The above is based on the assumption that after largely evening out the fiscal cliff Republicans and Democrats will also solve the debt ceiling problem at the beginning of the year. That should remove uncertainties over the economic 98 100 102 104 106 108 110 112 114 05 06 07 08 09 10 11 12 Germany EMU excl. Germany Real GDP 1 Q1 2005 = 100 Sources: OECD, DB Research - 40 - 30 - 20 - 10 0 10 20 30 40 08 09 10 11 12 Total Asia USA EMU German exports 2 3M mov.avg, % yoy Source: Deutsche Bundesbank - 10 - 8 - 6 - 4 - 2 0 2 4 6 - 5 - 4 - 3 - 2 - 1 0 1 2 3 07 08 09 10 11 12 % qoq (left) % yoy (right) Germany: Economic growth 3 Real GDP Sources: Federal Statistical Office, DB Research Focus Germany 3 | January 28, 2013 Current Issues outlook for the US economy and thus the investment backlog in the US will disappear. The term "fiscal cliff" describes the expiry of tax cuts introduced under former President Bush, of temporary tax relief granted by President Obama by end-2012 as well as automatic spending cuts resulting from the failed consolidation negotiations of 2011, which would have plunge the economy into deep recession in H1 2013. However, the US congress found a compromise at the turn of the year that postponed the automatic spending cuts by two months and completely avoided tax rate hikes except for households in high income brackets. We assume that the Democrats and Republicans – after long and hard negotiations – will also find a compromise concerning the debt ceiling. Moreover, economic growth looks set to pick up in the emerging markets, too. The Chinese economy, for instance, probably has left its trough behind already in Q4 2012 as growth picked up to 7.9% from 7.4% (Q3). In 2013 China should grow by over 8% again. Correspondingly, world trade – whose expansion rate probably halved to less than 3% in 2012 – is expected to show somewhat stronger growth in 2013. Also, the dampening effects of fiscal consolidation in the euro area look set to be smaller this year than last. According to our estimates, the adverse effects on economic growth will add up to almost 1% of GDP in 2013 due to consolidation measures compared with 1 ½% in 2012. All in all, this means the global environ- ment for the German economy will brighten, and we also expect fewer disrupt- ions from the euro crisis. Peripheral countries' budgets on the right track A look at public-sector budget balances shows that the consolidation process in the euro area is successful. To be sure, the countries of the southern periphery (except Italy) as well as France this year all look set to exceed the 3% deficit limit prescribed by the Stability and Growth Pact. With the exception of the smaller countries of Greece, Portugal and Ireland, however, all other euro-area members could remain below the threshold in 2014. We put the eurozone's public-sector deficit as a whole at 2.7% of GDP in 2013, after 3.3% in 2012. Given the weak growth rate, however, the debt ratio – i.e. total public-sector debt in relation to GDP – will continue to rise in nearly all euro-area countries and come to 95% at the end of 2014. ECB calmed markets ... Considerable uncertainties remain for the euro area as regards the implement- ation of the reform and consolidation programme in Greece, the large-scale problems besetting the Spanish banks as well as the discussion surrounding structural challenges for the Italian and French economies. With the announce- ment by ECB President Mario Draghi at end-July 2012 that the European Central Bank will do whatever it takes to preserve the euro, and with the bond purchase programme decided by the ECB in September 2012, the risks have become substantially smaller in our view. The bond purchase programme (OMT – Outright Monetary Transactions) allows unlimited purchases of a country's government bonds, particularly regarding maturities of one to three years, by the ECB if the country applies for support from the euro bailout fund and accepts its conditionality. According to the ECB, the reason for the programme was unjustified risk premia for exchange-rate risk which must not exist within the euro area. Previously, yield spreads of Spanish and Italian government bonds versus German Bunds had widened to more than 6 and 5 percentage points, respectively. At times, this meant that yields for 10Y government bonds stood at 7 ½% in Spain and at 6 ½% in Italy, which over the Economic growth 4 Real GDP, % yoy 2011 2012 2013 2014 USA 1.8 2.3 2.0 2.9 Japan - 0.5 2.0 0.6 0.6 Euroland 1.4 - 0.5 - 0.3 1.1 Germany 3.0 0.7 0.3 1.5 France 1.7 0.1 - 0.3 1.0 Italy 0.6 - 2.1 - 0.9 0.5 Spain 0.4 - 1.3 - 1.1 0.6 Netherlands 1.0 - 1.0 - 0.1 1.7 Greece - 7.1 - 6.5 - 4.2 0.9 Portugal - 1.6 - 2.9 - 1.2 0.8 Ireland 1.4 0.2 0.8 1.9 UK 0.8 - 0.1 0.9 1.8 Asia (ex Japan) 7.6 6.0 6.7 7.5 China 9.3 7.8 8.2 8.9 India 7.9 4.6 6.8 7.1 Eastern Europe 4.7 3.0 3.5 3.9 Lati n America 3.9 2.7 3.5 3.9 World 3.8 2.9 3.2 4.0 Sources: IMF, DB Research Budget balance 5 Total public sector, % GDP 2011 2012 2013 2014 Eurozone - 4.1 - 3.3 - 2.7 - 2.3 Germany - 0.8 0.1 - 0.4 - 0.2 France - 5.2 - 4.6 - 3.6 - 2.8 Italy - 3.9 - 2.9 - 2.3 - 2.5 Spain - 9.4 - 7.9 - 6.1 - 5.1 Netherlands - 4.5 - 4.0 - 3.2 - 2.0 Greece - 9.4 - 7.0 - 6.1 - 5.0 Portugal - 4.4 - 5.3 - 4.8 - 3.4 Ireland - 13.4 - 8.3 - 8.0 - 6.2 Sources: Eurostat, DB Research Public debt 6 Total public sector, % GDP 2011 2012 2013 2014 Eurozone 88.1 93.2 95.4 95.1 Germany 80.5 81.7 80.7 78.5 France 86.0 91.5 95.4 95.8 Italy 120.7 128.8 12 9.8 129.6 Spain 69.3 85.3 91.0 93.0 Netherlands 65.5 71.7 73.2 74.3 Greece 170.6 170.8 184.8 188.2 Portugal 108.1 115.8 119.0 120.2 Ireland 106.4 113.9 117.9 118.7 Sources: Eurostat, DB Research Focus Germany 4 | January 28, 2013 Current Issues longer term would have pushed the countries into a debt spiral given their weak growth rates. Financial markets reacted euphorically to the announcement of the programme, yield premia dropped and share prices rose. However, there is also stark criticism of the OMT programme, particularly from the Bundesbank which rejects the programme because of its similarities to government financing and potential inflationary dangers. ... and completes its strategy to solve the euro crisis The programme seems to complete the ECB's strategy to solve the government debt crisis. While national governments "are doing their homework", i.e. con- solidating public finances and strengthening the competitiveness of their econo- mies, and the European community together with the International Monetary Fund (IMF) supports this multi-year adjustment process under strict condition- ality through low-interest financing, the ECB will provide the necessary calm in the financial markets during the adjustment period and will fight speculation that might hamper the adjustment process. Although this strategy seems clear and logical, its implementation still harbours risks. The solution of the crisis for instance calls for perfect cooperation of all those involved at both the national and the European level which is not necess- arily guaranteed, however, given political imponderables, time inconsistencies resulting from national elections as well as potential moral hazard problems. The reform and consolidation efforts of a country could slow down if it can improve its short-term situation thanks to low interest rates and pass on the costs to others via the ECB. Correspondingly, disruptions to the resolution process are possible at any time. Also, the conditionality, i.e. purchases of government bonds linked to the condition of far-reaching adjustment programmes, does not seem to be a credible threat in an extreme scenario, as the ECB has explicitly ruled out the reversibility of the euro, and a withdrawal by the ECB would probably lead to large-scale losses and chaos in the markets, making such a scenario seem even more probable. Low-interest rate phase continues ... In light of the ECB's role as supporting pillar in the resolution of the euro crisis we expect it to keep interest rates low for the foreseeable future in order not to jeopardise the stability of the financial system and the economic stabilisation. Although the ECB’s measures have contributed to a stabilisation in the financial system the bank is likely to keep the key interest rate at its current low level of 0.75% into 2014 due to the weak economy. In the course of the worsening euro crisis yields of Bunds with a 10-year maturity have halved to 1 ½% and hovered around this level approximately since the spring/summer of 2012. At an inflation rate of 2% this would mean a negative yield of approx. ½%. We expect yield levels to normalise in the course of the current year. The strength of this return to normal will depend on the degree of calm in the euro area and thus the decline of Germany's safe-haven status. A yield level of around 2 to 2 ½% looks possible around year-end. In real terms, yields would then turn positive again (approx. ½%) but would still be extremely low in a historical comparison. Real yields of long-term Bunds, for instance, still averaged 4.4% between 1980 and 2000 and a remarkable 2.6% between 2000 and 2009. 0 1 2 3 4 5 6 7 11 12 13 IT ES Yield spreads to Germany 7 Spread to German 10Y bunds, pp Sources: Global Insight, DB Research Announcement of the OMT programme by Mario Draghi 0 1 1 2 2 3 3 4 4 11 12 13 % Source: DB Research 10Y bund yields 8 - 3 - 2 - 1 0 1 2 3 4 5 6 7 8 80 84 88 92 96 00 04 08 12 10Y govt. bond yield 3M money market rate Germany: Real interest rates 9 Nominal interest rate - inflation, % Sources: Federal Statistical Office, Global Insight Focus Germany 5 | January 28, 2013 Current Issues ... with considerable risks and side-effects To be sure, low interest rates provide advantages for public-sector finances and investment. They also create incentives for household borrowing. However, they also harbour considerable risks especially over a longer-term horizon. Particul- arly over the last few years it has become apparent that an excessively long low-interest period has led to a dramatic increase in public and private indebted- ness as well as to asset price bubbles, for instance in the property sector. The kind of excesses low interest rates can cause is reflected in the household debt situation. In Italy, for example, household debt has doubled in relation to GDP since 1999, and in Greece even quadrupled. Moreover, low interest rates could reduce consolidation pressures on public-sector budgets and bank balance sheets and raise the propensity of household and institutional investors to take risks. The low-interest phase causes problems above all for corporate pension funds and insurance companies. German insurance companies' stock of capital investments amounts to approx. EUR 1,300 bn, of which roughly 80% is invested in fixed-income securities. At present, insurance companies can meet the legal requirement of 1.75% minimum interest for new policies written since the start of 2012 relatively easily, as their portfolios still include bonds with long maturities and high coupons. Once these bonds fall due, however, this will change, so the guaranteed rate of interest might have to be lowered once again and the problem of low interest rates will thus be passed on to those taking out insurance policies, i.e. households. Moreover, household savings will have to rise or the period of saving to be prolonged to be able to make the necessary private provisions in light of expected cuts to government pensions caused by demographic change. The following example shows the extent of the compound interest effect. With interest rates down by 1 percentage point, nearly one- quarter more must be saved or savings must be prolonged by 4.5 years in order to achieve the same pension from private old-age provision, which foresees a 20-year savings phase and a pay-out phase of 24 years. Our forecast for Germany in detail: Net exports negative in 2013 The German economy has successfully geared its operations especially to demand from the dynamically growing emerging markets. The share of exports to Asian EMs, for instance, has doubled to 10% since 2000, with China's share in that period growing four and a half times to more than 6% and turning the country into Germany's fifth most important sales market. Nearly half of Germany's exports are machinery and transport equipment, i.e. capital goods. This group of goods even accounts for more than 72% of Germany's exports to China. This has its advantages and provides growth impetus in global upswing phases but also has its disadvantages in downturn phases, especially if invest- ment is scaled down strongly, as shown by recent developments. Investment in plant and equipment, for instance, decreased markedly in the southern peri- pheral countries in 2012, with Spain recording a decline of nearly 7%, Italy and Portugal over 10% and Greece 14%. German exports therefore look set to remain weak at least throughout the first quarter of the year. With the recession petering out in the eurozone peripherals, the second half of the year will likely see demand from these countries pick up somewhat. Together with continued lively demand from the emerging markets, and particularly China, this will probably boost dynamics in the export sector. In light of the weak starting point at the beginning of the year, though, we expect real exports to grow somewhat less strongly than last year, by 3 ½% on average in 2013. 0 20 40 60 80 100 120 IT GR ES PT 1999 2011 Private households: Liabilities 10 % GDP Source: Eurostat 0 2 4 6 8 10 12 60 64 68 72 76 80 84 88 92 96 00 04 08 12 10Y govt. bond yield Minimum interest rate for new policies % Sources: BaFin, Global Insight 10Y bond yields & minimum interest rate for new insurance policies 11 0 2 4 6 8 10 12 99 01 03 05 07 09 11 China Emerging markets in South - East Asia Other Asian countries % of total exports Source: Deutsche Bundesbank German exports to Asia 12 Focus Germany 6 | January 28, 2013 Current Issues Given the growth of domestic demand, real imports in 2013 look set to expand somewhat faster – at a good 4% – than exports. Correspondingly, net exports will shave off roughly one-quarter of a percentage point of growth. In 2012 net exports had still contributed just over 1 percentage point to economic growth. As a result, Germany's current account surplus will shrink to approx. EUR 155 bn or 5 ¾% of GDP in 2013, following approx. EUR 170 bn or just under 6 ½% of GDP last year. Only moderate recovery of investment in plant and equipment Poor export dynamics, falling profits and uncertainties surrounding the sovereign debt crisis probably were the main reasons behind the 4.4% decline in investment in machinery and transport equipment in 2012. A look at the investment ratio, i.e. the relation between investment in plant and equipment and GDP, reveals that it is higher in Germany than in other European countries. However, this does not constitute overinvestment which – when reduced – would hamper corporate investment activity over a longer period of time. A capital-intensive manufacturing economy such as Germany needs higher investments than other countries where production is more labour-intensive. Also, Germany's industrial sector contributes almost one-quarter to total gross value added and thus ranks second in a European comparison, after Ireland. Against this backdrop, a higher investment ratio in Germany therefore not only appears logical but even absolutely essential. Hence, the current weakness of investment is a cyclical phenomenon which will probably reach its lowest point soon. Nonetheless, the recovery in investment in plant and equipment we expect will probably remain moderate despite the low interest environment. We assume that profit expectations will improve only gradually. This is suggested by per- sisting uncertainty regarding the sovereign debt crisis as well as weak growth in the eurozone due to an ongoing consolidation of public-sector finances, despite our forecast of an economic recovery in the emerging markets. In addition, capacity utilisation in Germany's industrial sector took another hefty blow in Q4 2012 and came in 2.5 percentage points below the long-term average. All in all, average quarterly growth of investment in plant and equipment in 2013 will probably come to just under 1%, which is less than half the 2004-2007 figure when investment in plant and equipment had risen by 2 ¼% per quarter. Due to the large growth underhang at the beginning of this year (over 3%) this will result in another decline in investment in plant and equipment of 1 ¼% on an annual average. 5.0 2.3 2.3 15.3 23.7 47.6 3.8 Food Crude materials Mineral fuels Chemicals Manufactured goods Machinery & transport equipment Other goods German e xports by main categories 13 2011, % of total exports Source: OECD - 6 - 4 - 2 0 2 4 6 06 07 08 09 10 11 12 13 Govt. consumption Net exports Private consumption Investment Real GDP, % yoy Germany: Growth contribution 14 pp Sources: Federal Statistical Office, DB Research - 30 - 20 - 10 0 10 20 - 50 - 30 - 10 10 30 50 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 12M forward profits (left) Investment in machinery & equipment (right) Germany: Profits & investment 16 % yoy Sources: Federal Statistical Office, IBES Thomson Reuters - 30 - 20 - 10 0 10 20 30 00 02 04 06 08 10 12 Investment in machinery & equipment Nominal exports Exports & investment 15 % yoy Source: Federal Statistical Office Focus Germany 7 | January 28, 2013 Current Issues Construction investment: Upswing to continue Following a weak first half of the year, which also reflects an ongoing return to normal of public investment activity after the economic stimulation programmes had expired, construction investment recovered in the second half of 2012. Nonetheless, it fell by 1.1% on an annual average. Construction investment also showed strongly diverging developments in 2012 as regards the residential construction sector and commercial and public construction. While investment in residential construction probably rose by a good 2%, commercial construction investment was down slightly (-1%) and public-sector construction investment took a sharp plunge (-13%). This divergence looks set to continue this year, albeit to a somewhat less pronounced degree. The economic environment continues to be conducive to investment in residential construction. Besides low financing costs, extremely low investment yields which will probably continue to drive portfolio restructuring and thus the flight into real assets, the relatively stable labour market, favourable income prospects and high net immigration all suggest strong demand for residential properties for some time to come. The ongoing increase in building permits in the residential sector also points to an increase in residential construction investment this year by roughly 3% compared with 2012. No real estate bubble It is true that property prices rose by roughly 8% in Germany's conurbations and by around 5% in Germany as a whole in 2011 as well as in 2012, driven by stronger demand. Nonetheless, Germany is nowhere near a real estate bubble. Property prices were up by a noticeable degree in 2010 for the first time since 1995. Also, measured in terms of affordability, i.e. property prices in relation to disposable income, the German market is still undervalued by roughly 20% at present, according to OECD calculations. What is more, property prices and disposable incomes have been rising in tandem lately. Very little impetus from commercial and public construction By contrast, very little or no impetus at all is expected from commercial and public construction investment in the current year. Investment in commercial construction, especially in office buildings and retail outlets, is suffering from weak business activity and persisting uncertainties. The strong increase in commercial construction in 2011 (+8%) and the recent slump in capacity utilisation in manufacturing also do little to raise hopes of an improvement. We therefore forecast a slight decline in commercial construction investment this year, too. Even though public construction investment looks set to rise slightly in 2013 in the areas of road construction and civil engineering, the structural underfunding of many municipalities remains a major obstacle in light of the strong regional divergence of tax revenues. Overall, construction investment is likely to rise by 2% in 2013, after having fallen by 1% last year. 80 90 100 110 120 130 140 150 160 07 08 09 10 11 12 Q1 2007 = 100, 3M mov.avg. Germany: Housing permits 17 Source: Federal Statistical Office 70 80 90 100 110 120 130 140 150 160 170 00 01 02 03 04 05 06 07 08 09 10 11 DE FR IT UK IE ES House prices 18 Source: OECD Price - to - income ratio, long - term average = 100 20 22 24 26 28 30 32 34 36 03 04 05 06 07 08 09 10 11 12 EUR bn. 4Q mov. sum Germany: Public construction investment 19 Source: Federal Statistical Office Focus Germany 8 | January 28, 2013 Current Issues Industrial production is set to stagnate in 2013 Germany's industrial sector staged an impressive recovery from the deep recession of 2008/09 and was able to slightly exceed the production record of 2008 on an annual average in 2011. In this respect German industrial companies made a major contribution to the economic upswings of 2010/11. Since the second half of 2011, however, the pronounced economic cooling in Germany and major export markets has begun to make itself felt. Domestic production has since trended downward slightly. In 2012, industrial output probably fell by an inflation-adjusted 1%. This result is still quite satisfactory considering that the economy in western European countries performed poorly again. The strong position of German industrial firms in North America or Asia for instance prevented a stronger decline in domestic industrial output. However, the recent cooling of the economy in many important non-European markets became most apparent in Q4 2012 when industrial output in Germany dipped sharply by a good 2%. Above all, the major export-intensive business sectors such as the automotive industry, mechanical engineering and electrical engineering reined in production significantly towards the end of last year, especially as they, too, didn’t receive any stimulus from domestic demand. On account of this production decline in Q4 2012 industry started the new year with a statistical underhang. This underhang of roughly 2.5% is also the main reason why we recently lowered our forecast for German industrial production in 2013; instead of 1.5% growth we now expect stagnation. Our forecast is based on the expectation that output will trend up in the course of 2013, which will compensate for the weak start and result in a flat performance of output for the year as a whole. The reasons for the cautious optimism lie among other things in the develop- ment of manufacturing sector’s business expectations. They have improved for the fourth time in succession recently, even though they have still not emerged from the negative zone. New order intake has also stabilised of late. Comparing the output forecasts for individual industrial segments it is striking that we expect only minor fluctuations downwards or upwards. Last year already saw the variance in growth rates in the individual sectors narrow significantly compared with the period 2009 to 2011. This is to be interpreted as return to normal following the extraordinarily deep crisis of 2008/09 and the equally extraordinarily rapid recovery in 2010/11. As such, the trend towards a return to somewhat calmer waters for the German manufacturing sector will probably continue in 2013. Of the major sectors the early-cycle chemicals industry should post the best performance this year with an increase in output of 1.5%. The industry appears to have already emerged from its cyclical slump. We expect electrical engineer- ing to achieve a marginal increase in output and mechanical engineering output to move sideways in 2013. In both sectors the most important drivers will prob- ably remain the non-EU countries. In the automotive industry, by contrast, we believe that output will probably decline in 2013 by around 2% in real terms – albeit from a high starting base. There is certainly potential for a positive surprise. It could turn out that the dips in production in Q4 2012 were so pronounced primarily because by taking a prudent approach and seeking to avoid an inventory build-up the sector applied the brakes more forcefully than would have been necessary. The food business is likely to grow again by about 1% this year after experiencing one of its extremely rare declines in production (2012: -0.5%). 80 90 100 110 120 05 06 07 08 09 10 11 12 Germany EMU excl. Germany 2005=100, 3M mov.avg. Sources: Eurostat, Federal Statistical Office, DB Research Industrial production 20 60 80 100 120 140 07 08 09 10 11 12 Domestic Foreign (EMU) Foreign (Non - EMU) 2005=100, 3M mov.avg. Germany: New orders 21 Source: Federal Statistical Office - 60 - 40 - 20 0 20 40 60 06 07 08 09 10 11 12 13 Business expectations Assessment of business situation Source: ifo Germany: ifo business climate 22 Manufacturing, % - balance Focus Germany 9 | January 28, 2013 Current Issues Private consumption most important driver of growth in 2013 Private consumption has developed quite satisfactorily over the past few years. After more or less stagnating between 2000 and 2008, private consumption became an important pillar of growth in 2011 and 2012. In 2013, it will probably even be the most important driver of growth. We expect consumption expend- iture this year to grow by over ½% in real terms and thus only slightly slower than the 0.8% in last year, supported by solid wage growth, lower pension contributions and a relatively stable labour market. Nominal disposable income looks set to rise by roughly 2 ¼% in 2013, inflation to average 1 ¾% and the savings ratio to remain at 10.3%. Labour market remains relatively stable The global weakening of growth has already made itself felt in the labour market. The jobless total, for instance, has risen slightly since the middle of 2012 and the growth rate of workers obliged to make social security contrib- utions has slowed from 2 ¾% at the beginning of 2012 to approx. 1 ½% recently. This diverging development of employment and unemployment is largely attributable to relatively high immigration numbers. 2012 saw 340,000 persons (net) migrating to Germany, after 279,000 in the full year 2011. Immigration from EU countries, especially the peripheral countries, was up strongly as jobs were scarce there due to the deep recession and the desolate labour market situation. The results of company surveys about staffing plans for the next few months show that staff numbers are being revised down and job cuts are looming. Also, leading indicators for labour market developments, such as the ifo employment barometer, the Federal Employment Agency's indicator for labour demand (the BA-X), the number of vacant jobs and of temporary workers have been declining since the second half of 2011, but are still at a relatively high level. In addition, the ifo employment index picked up again at the turn of the year which should be felt on the labour market sometime mid-2013. Employment growth, however, still looks set to slow on an annual average, and the jobless total will probably rise but remain below the 3 million mark on an annual average this year. Correspondingly, the unemployment rate is expected to rise somewhat to 7.0%, up from 6.8% in 2012. Hence, the situation in the German labour market can still be considered relatively stable by international standards, and particularly positive in a European comparison. 2013 likely to see no more than ¼% growth After a weak start to the year, we now expect business activity in Germany to pick up in the summer half. Given the low starting point, however, economic growth will come to no more than ¼% on average in 2013, compared with 0.7% last year. Growth is supported mostly by private consumption spending, while net exports are making a negative contribution. If the euro area continues to stabilise and the global economy picks up as we expect – we think global economic growth in 2014 of 4% is conceivable – the upswing in Germany will probably continue as well, leading to real GDP growth of 1 ½% next year. There are, naturally, considerable risks to the forecast of an economic turning point, which we expect for spring 2013. It would be wrong, however, to see the recent improvement in business confidence indicators as a first sign that the economy will recover more strongly and our growth forecast will be exceeded. Rather, the fact that sentiment indicators have turned out somewhat better is a Germany – industrial production 23 % yoy 2011 2012 2013 Food 1.1 - 0.5 1.0 Beverages 3.7 0.5 1.0 Textiles 1.3 - 7.0 - 1.0 Clothing 0.2 - 8.0 - 8.0 Paper 0.5 - 1.5 1.0 Chemicals 1.3 - 3.0 1.5 Pharmaceuticals 4.7 - 2.5 0.5 Plastics 5.8 - 0.5 0.0 Building materials 8.2 - 4.0 - 1.0 Metal manufacturing 4.8 - 3.0 0.5 Metal products 11.7 - 1.0 1.5 Electrical engineering 14.3 - 2.0 0.5 Mechanical engineering 13.3 1.5 0.0 Automobile 13.3 0.0 - 2.0 Manufacturing 8.7 - 1.0 0.0 Sources: Federal Statistical Office, DB Research 4.0 4.5 5.0 5.5 6.0 6.5 7.0 7.5 8.0 8.5 9.0 - 100 - 80 - 60 - 40 - 20 0 20 40 60 80 100 08 09 10 11 12 Number of unemployed (left) Unemployment rate (right) Source: Deutsche Bundesbank Germany: Unemployment 24 Change mom, 1,000 (left), % (right) - 3 - 2 - 1 0 1 2 3 4 90 95 100 105 110 115 01 02 03 04 05 06 07 08 09 10 11 12 13 ifo employment barometer (right) Employment* (right) ifo employment barometer & employment 25 2005 = 100 (left), % yoy (right) *) Shifted forward 6 months Sources: ifo, Deutsche Bundesbank Focus Germany 10 | January 28, 2013 Current Issues necessary prerequisite for our growth forecast, which assumes that the cyclical trough has already been passed at the start of 2013. Inflation down somewhat The increase in consumer prices amounted to approximately 2% both at the end of 2012 and as an annual average. This rise has been mainly driven by higher prices for food and energy (up 3.2% and just under 5.7%, respectively). Exclud- ing food and energy, the so-called core inflation rate only came to 1.3%. Domestic price pressure is not in sight given the increasing underutilisation of production capacities in the course of slightly below-potential growth rates. We therefore expect the core inflation rate to continue to move in a narrow band between 1 and 1 ½%. As we assume oil prices to be virtually unchanged and the euro to weaken only slightly – we look for USD 1.20 per EUR at year-end 2013 – the increase in energy prices this year should remain below that registered last year despite markedly higher electricity prices. Correspondingly, inflation looks set to slow somewhat in the course of the year and should come to a halt at approx. 1 ¾% on an annual average. Longer-term inflation risks have risen, as the ECB's monetary policy is too expansionary for Germany and its OMT programme may harbour negative consequences. However, these risks will initially make themselves felt more strongly in asset prices rather than consumer prices. Public finances in good shape Germany's public-sector finances are in good shape. Public budgets registered a surplus of 0.1% of GDP in 2012. This was achieved mainly by soaring tax revenues thanks to strong business activity, by lower interest payments on public-sector debt due to lower yield levels as well as by the expiry of economic stimulus packages. However, weaker economic growth and cuts to pension contributions by 0.7%- points to 18.9% will mean that the budget balance will be slightly negative again in 2013. Therefore, stricter austerity efforts to consolidate the budget not only on the revenue side, as has been the case so far, but also on the expenditure side do make sense. However, Germany's fiscal policy course looks justifiable in light of weakening growth and the fact that the 2013 shortfall will probably come to no more than ½% of GDP, keeping Germany in an excellent position inter- nationally. With growth picking up again, the deficit looks set to narrow further in 2014. Germany is thus well positioned to meet the debt rule anchored in its Basic Law, which limits the structural budget deficit to 0.35% of GDP from 2016. Moreover, it is probably the only eurozone country to achieve a lower (and falling) debt ratio already this year. Risks to this scenario lie in potential burdens stemming from the euro crisis. 2013 federal elections: New government in the offing? According to a survey conducted in January 2013, the current CDU/FDP coalition with 44% – more than over the last two years – is slightly ahead of the possible SPD/Greens coalition with 42%. The federal elections presumably in September 2013 could still bring about a change in government, especially if the Liberal Democrats (FDP) – currently at 5% – fail to clear the 5% hurdle which would mean a bitter loss of around 10 percentage points compared with the last federal election in September 2009 (14.6%). If the elections were held today, the Christian Democrats (CDU/CSU) would garner 39% of the vote (2009 - 1 0 1 2 3 4 5 6 - 0.5 0.0 0.5 1.0 1.5 2.0 2.5 3.0 10 11 12 13 14 % qoq (left) % yoy (right) Germany: Economic growth 26 Real GDP Sources: Federal Statistical Office, DB Research - 1.0 - 0.5 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 07 08 09 10 11 12 Headline Core (ex food & energy) Germany: Inflation 27 % yoy Source: Federal Statistical Office 50 55 60 65 70 75 80 85 - 5 - 4 - 3 - 2 - 1 0 1 2 00 02 04 06 08 10 12 14 Budget balance (left) Public debt (right) Germany: Public finances 28 Total public sector, % GDP Sources: Deutsche Bundesbank, DB Research Focus Germany 11 | January 28, 2013 Current Issues election: 33.8%), the Social Democrats (SPD) 28% (23.0%), the Greens approx. 14% (10.7%) and the Left approx. 7% (11.9%). Potential alternative government coalitions imply the risk that successful reforms could be unwound, even though they will become even more necessary in future. Bernhard Gräf (+49 69 910-31738, bernhard.graef@db.com) Eric Heymann (+49 69 910-31730, eric.heymann@db.com) Jochen Möbert (+49 69 910-31727, jochen.moebert@db.com) Heiko Peters (+49 69 910-21548, heiko.peters@db.com) Oliver Rakau (+49 69 910-31875, oliver.rakau@db.com) Stefan Schneider (+49 69 910-31790, stefan-b.schneider@db.com) Germany – economic forecast 2 9 % yoy 2011 2012 2013 2014 Real GDP 3.0 0.7 0.3 1.5 Private consumption 1.7 0.6 0.6 1.0 Gov't expenditure 1.0 1.0 1.0 0.7 Fixed investment 6.2 - 2.1 1.1 2.8 Investment in M&E 7.0 - 4.4 - 1.2 4.4 Construction 5.8 - 1.1 1.9 1.5 Inventories *, pp 0.2 - 0.5 - 0.2 0.0 Exports 7.8 4.1 3.2 4.9 Imports 7.4 2.3 4.2 5.0 Net exports *, pp 0.6 1.1 - 0.2 0.3 Consumer prices 2.3 2.0 1.7 1.6 Budget balance, % GDP - 0.8 0.1 - 0.4 - 0.2 Unemployment rate, % 7.1 6.8 6.9 6.8 Balance on current account, % GDP 5.7 6.4 5.7 5.5 * Growth contribution Sources: Federal Statistical Office, DB Research Focus Germany 12 | January 28, 2013 Current Issues Economic forecasts Real GDP Consumer Prices Current Account Fiscal Balance (% growth) (% growth) (% of GDP) (% of GDP) 2012F 2013F 2014F 2012F 2013F 2014F 2012F 2013F 2014F 2012F 2013F 2014F Euroland - 0.5 - 0.3 1.1 2.5 1.6 1.6 0.9 1.3 1.6 - 3.3 - 2.7 - 2.3 Germany 0.7 0.3 1.5 2.0 1.7 1.6 6.4 5.7 5.5 0.0 - 0.5 - 0.3 France 0.1 - 0.3 1.0 2.2 1.5 1.6 - 2.1 - 2.0 - 2.3 - 4.6 - 3.6 - 2.8 Italy - 2.1 - 0.9 0.5 3.3 1.8 1.5 - 1.0 - 0.3 - 0.2 - 2.9 - 2.3 - 2.5 Spain - 1.3 - 1.1 0.6 2.5 2.2 1.3 - 1.8 0.0 - 0.2 - 7.9 - 6.1 - 5.1 Netherlands - 1.0 - 0.1 1.7 2.8 2.3 1.8 9.0 9.0 9.5 - 4.0 - 3.2 - 2.0 Belgium - 0.2 0.0 1.0 2.6 1.8 1.7 0.0 0.5 1.0 - 3.4 - 3.3 - 2.6 Austria 0.5 0.9 1.3 2.5 2.0 1.9 1.2 1.8 2.1 - 3.1 - 2.8 - 2.5 Finland - 0.1 0.0 1.2 3.1 2.5 2.2 - 1.5 - 1.0 - 0.5 - 0.8 - 0.8 - 0.5 Greece - 6.5 - 4.2 0.9 1.1 0.1 - 0.2 - 6.0 - 4.0 - 3.0 - 7.0 - 6.1 - 5.0 Portugal - 2.9 - 1.2 0.8 2.8 1.0 1.2 - 1.5 0.0 1.0 - 5.3 - 4.8 - 3.4 Ireland 0.2 0.8 1.9 2.0 1.4 1.5 2.0 2.5 3.0 - 8.3 - 8.0 - 6.2 UK - 0.1 0.9 1.8 2.8 2.5 2.2 - 4.7 - 4.4 - 3.5 - 5.3 - 6.7 - 5.9 Denmark - 0.5 1.5 1.5 2.5 1.8 1.8 5.5 4.5 4.5 - 4.5 - 2.0 - 2.0 Norway 3.2 2.5 2.5 0.7 2.0 2.0 15.0 13.0 13.0 12.5 11.5 11.5 Sweden 1.2 1.9 1.9 0.9 2.0 2.0 7.5 6.0 6.0 - 0.5 0.0 0.0 Switzerland 1.0 1.5 1.7 - 0.6 0.4 0.8 11.0 10.5 10.0 0.0 0.2 0.5 Czech Republic - 0.8 1.0 3.4 3.3 2.5 2.1 - 1.8 - 1.6 - 1.7 - 3.5 - 3.2 - 2.7 Hungary - 1.3 0.0 1.6 5.7 4.1 3.5 0.9 1.5 0.9 - 3.0 - 2.9 - 2.8 Poland 2.2 1.6 2.3 3.8 2.6 2.3 - 3.4 - 3.0 - 3.7 - 3.6 - 3.5 - 2.9 United States 2.3 2.0 2.9 2.1 2.3 2.5 - 3.1 - 3.3 - 3.4 - 7.1 - 6.3 - 5.3 Japan 2.0 0.6 0.6 - 0.1 - 0.6 1.6 1.2 1.4 1.9 - 10.0 - 9.9 - 8.2 World 2.9 3.2 4.0 3.3 3.2 3.5 Sources: National Authorities, Deutsche Bank Forecasts: German GDP growth by components, % qoq, annual data % yoy 2012* 2013 2010 2011 2012 2013F 2014F Q1 Q2 Q3 Q4F Q1F Q2F Q3F Q4F Real GDP 4.2 3.0 0.7 0.3 1.5 0.5 0.3 0.2 - 0.3 0.0 0.2 0.4 0.2 Private consumption 0.9 1.7 0.8 0.6 1.0 0.0 0.1 0.3 0.1 0.0 0.2 0.4 0.3 Gov't expenditure 1.7 1.0 1.0 1.0 0.7 0.4 - 0.2 0.4 0.0 0.4 0.5 0.1 0.1 Fixed investment 5.9 6.2 - 2.1 1.1 2.8 - 0.8 - 2.1 0.2 - 0.1 0.4 0.6 0.6 0.6 Investment in M&E 10.3 7.0 - 4.4 - 1.2 4.4 - 0.9 - 4.0 - 2.0 - 1.5 0.5 0.9 1.0 1.0 Construction 3.2 5.8 - 1.1 1.9 1.5 - 0.7 - 1.1 1.5 1.0 0.3 0.3 0.1 0.1 Inventories, pp 0.6 0.2 - 0.5 - 0.2 0.0 0.0 0.0 - 0.3 0.0 0.0 0.0 0.0 0.0 Exports 13.7 7.8 4.1 3.2 4.9 0.7 3.3 1.4 - 0.5 0.5 1.0 1.3 1.0 Imports 11.1 7.4 2.3 4.2 5.0 - 0.7 2.2 1.0 0.2 1.0 1.3 1.3 1.3 Net exports, pp 1.7 0.6 1.1 - 0.2 0.3 0.7 0.7 0.3 - 0.4 - 0.2 - 0.1 0.1 - 0.1 Consumer prices 1.1 2.3 2.0 1.7 1.6 2.2 1.9 1.9 1.9 1.8 1.6 1.7 1.5 Unemployment rate, % 7.7 7.1 6.8 7.0 6.8 6.8 6.8 6.8 6.9 7.0 7.0 7.0 7.0 Budget balance, % GDP - 4.1 - 0.8 0.1 - 0.5 - 0.3 Balance on current account, % GDP 6.0 5.7 6.4 5.7 5.5 *Forecasts based on data including Q3 2012, as Federal Statistical Office has so far only published full - year data for 2012. Sources: Federal Statistical Office, DB Research Focus Germany 13 | January 28, 2013 Current Issues Chart of the month German residential property prices – review and outlook Review: Residential property prices continued to rise The positive price development on the German residential property market continued in 2012. According to recent data from BulwienGesa, prices rose by roughly 5%, thus to the same extent as in 2011. At an increase of 5 ½%, apartment prices went up particularly strongly. In the largest towns (A cities), they even rose by close to 8%. The prices of single-family homes and terraced housing rose by roughly 3%. Given an inflation rate of 2%, the price increase of houses in real terms thus still came to 1%. The real-estate boom continues to be particularly strong in large towns with a powerful economy. In some towns, even double-digit price increases were registered. At almost 7%, price increases were strongest in A-towns, while residential property prices in B-cities rose by 4.7%, in C-cities by 3.9% and in D-cities by 3.5% (see chart). In structurally weak cities prices stagnated or even fell, in some cases by up to 5%. Outlook: Upswing to continue For 2013, we expect a similar macroeconomic situation to that in 2012: weak overall economic growth with quite stable rates of unemployment and a slight increase in employment figures. Real incomes should also rise slightly. For 2013, we expect wage increases to exceed the productivity increase. In view of the ECB's abundant liquidity supply and the falling yields on South European government bonds, Germany's residential real estate with rental yields of typically over 4% continues to be very attractive. For this reason portfolio switching from financial assets to the real-estate market remains an interesting investment opportunity for both German private and institutional investors. Due to the massive unemployment in the South European countries, net immigration (2012: +340,000) and capital inflows could continue to bring positive momentum for the German residential real estate market and stimulate demand. In view of globalisation, urbanisation and demographic effects, the divergence between residential property prices is likely to increase further. Competitive cities will attract employees, while the number of inhabitants of towns with fewer competitive companies will tend to stagnate or decline. The corresponding differences in housing demand should continue to be reflected in prices. Jochen Möbert (+49 69 910-31727, jochen.moebert@db.com) ABCD - Category A - Cities: major cities in Germany, large property markets B - Cities: bigger cities of national and regional importance C - Cities: larger cities, of limited national importance, but with broad regional influence D - Cities: smaller cities, with regional or local focus, central functions for direct hinterland. Source: BulwienGesa ABCD-Category -4 0 4 8 2000 2003 2006 2009 2012 A - Cities Total (Bundesbank weighting scheme) D - Cities 2012 Residential property prices DX % yoy Sources: BulwienGesa, DB Research Focus Germany 14 | January 28, 2013 Current Issues Chartbook: Business cycle (1) — At +0.7% GDP growth was much lower in 2012 compared to 2011 (+3.0%). In addition, growth slowed strongly during the year from +0.5% qoq in Q1 2012 to presumably - 0.5% qoq in the last quarter. — Strong exports especially in the first half of the year and to a lesser extend consumption contributed positively to overall growth. Investment in machinery & equipment as well as construction were a drag on growth. — First signs – increases in the ifo index and somewhat higher growth in China – point towards a stabilisation/ recovery in Germany in spring. Due to the weak winter half our forecast for 2013 GDP growth is ¼%. — Compared to the rest of EMU the slowdown in Germany is still moderate. Admittedly, German GDP shrank in two out of the last five quarters (Q4 2011 and Q4 2012). However, it shrank in all five quarters in the rest of EMU. — Considering the remaining adjustment needs in several EMU countries the EMU economy should remain in recession until early 2013 and set out on a very low growth trajectory thereafter. On average EMU GDP should decline by 0.5% in 2012 and 0.3% in 2013. — The ifo index at 104.2 (pre v. 102.4) surprised strongly to the upside in January. Historically, three consecutive rises in the ifo suggest a cyclical turning point, which supports our expectation of only one negative quarter for GDP growth (Q4). However, we still expect weak Q1 1 3 . — The increase of the ifo was again mostly driven by the expectation component, up for the fourth consecutive time in January. The situation component on the other hand has more or less stagnated over the last 4 months. — A warning: This is reminiscent of earl y 2012, when better sentiment did not show up in yoy growth rates of industrial production and was later reversed. — The manufacturing PMI now seems to be on track towards 50 as it increased strongly from its Q4 average of 46.3 to 48.8 in January. New orders fell at the slowest rate since June 2011 and manufacturing output was in expansionary territory for the first time since March 2012. — The services PMIs went up to 55.3 in January (Dec. : 52.0; Nov . : 49.7). New business and business expect - ations both above 53.0 point to a solid expansion of output. — Further modest increases in the ifo and PMI would be consistent with muted industrial production in the near term and a recovery in spring. - 1 0 1 2 3 4 5 6 - 0.5 0.0 0.5 1.0 1.5 2.0 2.5 3.0 10 11 12 13 % qoq (left) % yoy (right) Real GDP growth Sources: Federal Statistical Office, DB Research - 1.0 - 0.5 0.0 0.5 1.0 1.5 2.0 2.5 10 11 12 13 14 EMU ex DE DE GDP growth: DE vs EMU % qoq Source: Eurostat 70 80 90 100 110 120 130 08 09 10 11 12 13 Expectations Business Situation Business Climate Ifo i ndex - total economy 2005=100 Source: ifo 30 35 40 45 50 55 60 65 08 09 10 11 12 13 Composite Manufacturing Services Purchasing manager index PMI, i ndex Source: Markit Focus Germany 15 | January 28, 2013 Current Issues Chartbook: Business cycle (2) — Falling by 1.8% month - on - month in Nov. new orders reversed most of the 3.8% increase in Oct. as the effect from big ticket orders was reversed. — Demand for German industrial goods seems to stabilise. Core orders (ex. airplanes, ships, trains) have improved slightly in Oct./Nov. after heavy declines in Q3. — Compared to the previous year the order level is still down by 1.7% (two months average) espec ially due to significant declines in orders from EMU countries. — Somewhat improved sentiment and slightly faster growth in China suggests that orders could improve gradually. — Industrial production slumped towards the end of 2012. After falling by 1.2% m om in Sep. and 2.0% in Oct. production improved only slightly by 0.2% in Nov. — In Q4 production is likely to have fallen by more than 2% as output of investment goods and the auto sector experienced heavy declines. — Sentiment as well as new orders point to s ubdued output trend going into Q1 with only small monthly gains. — The number of employed persons is still 0.6% higher than a year ago and with 41.6 m it hovers near a historic high. The level of employees subject to social security payments is up 1.4% yo y. — Employment growth is tapering off. While employment grew by 30,000 per month on average in H1, there was only an increase of 6,000 in Q3. In November employ - ment fell by 1,000 after much stronger declines in September ( - 19,000) and October ( - 10,000). — In December unemployment rose for the ninth time in a row. The increase of 3,000 to around 2.9 m was lower than in the two preceding months (Oct. +19,000; Sep. +10,000). The unemployment rate is at 6.9%. — Early indicators – ifo, PMI, BA - X – point to a furt her weakening of the labour market until mid - 2013.The marked improvement of the ifo employment barometer in Nov. and Dec. is evidence pointing to an improvement from mid - 2013 on. — The unemployment rate should average 6.9% in 2013, only slightly higher than in 2012 (6.8%). -30 -20 -10 0 10 20 30 11 12 Total Domestic Foreign - EMU Foreign - Non - EMU New manufacturing orders % yoy Source: Federal Statistical Office 77 82 87 92 97 102 107 112 117 -25 -20 -15 -10 -5 0 5 10 15 20 08 09 10 11 12 13 Industrial production (left) ifo expectations (4M lag, right) % yoy (left), 2005=100 (right) Sources: ifo, Federal Statistical Office Industrial production and ifo expectations 90 95 100 105 110 115 120 - 0.5 0.0 0.5 1.0 1.5 2.0 08 09 10 11 12 13 Employment (left) ifo employment barometer (6M lag, right) % yoy (lef), 2005=100 (right) Sources: ifo, Federal Employment Agency Employment and ifo employment baromter - 100 - 50 0 50 100 150 200 4 5 6 7 8 9 10 08 09 10 11 12 13 Change in unemployment (right) Unemployment rate (left) Unemployment % of total civilan labour force (left); mom, '000 (right) Sources: Federal Employment Agency, DB Research Focus Germany 16 | January 28, 2013 Current Issues Chartbook: Business cycle (3) — Inflation in 2012 averaged 2.0% somewhat lower than in 2011 (2.3%). Energy price inflation slowed markedly (to 5.7% from 10.0%), while food prices accelerated slightly (2.9% to 3.2%). Core inflation came in at 1.3%, the same as in the year before. — We expect inflation to slow further this year to 1.7% on the back of an only modest oil price increase. Core inflation should remain muted due to the weakening labour market. The rise in core inflation at th e end of 2012 was largely driven by one - off effects. Food prices pose limited upside risks to our forecast. — World trade decelerated in the last few months and was up only 2% on average over the last three months which has increasingly dampened German ex ports over the course of the year. — In November exports ( - 3.4% mom) and imports ( - 1.0% mom) fell. The trade balance narrowed further to EUR 14.6 bn from EUR 14.8 bn in October. This is a marked drop from the EUR 18.4 bn recorded in August. — Year - on - year expo rts were virtually unchanged in November which shows the clear slowdown from the beginning of 2012. Imports were down 1.1% yoy in November. — Since the onset of the euro crisis EMU’s share in German exports has dropped by almost 10 percentage points to around 38% (Asia 17% and the US 8%). — In the wake of the euro crisis and the recession in several EMU countries exports to EMU have fallen below their pre - year level. — So far, exports to Asia and the US have managed to compensate for the declines in exports to EMU, which was mainly due to automobile exports. — Exports should slow further in 2013 according to ifo export expectations which fell to a 40 - months low in October and remained below their historic average despite a 4 - point increase in Nov./Dec. — Impor ts should remain comparably stable, by comparison, due to the high level of employment and moderate increases in real income. — The growth contribution from net exports should become negative in the winter half. -1 -1 0 1 1 2 2 3 3 4 08 10 12 Core inflation Inflation Sources: Federal Statistical Office, DB Research % yoy Inflation rate and core inflation rate 0 5 10 15 20 25 30 35 40 - 30 - 20 - 10 0 10 20 30 40 08 09 10 11 12 Trade balance (right) Exports (left) Imports (left) Merchandise trade % yoy (left), EUR bn (right) Source: Deutsche Bundesbank - 40 - 30 - 20 - 10 0 10 20 30 40 08 09 10 11 12 Total Asia EMU USA German merchandise exports by destination Merchandise e xports, % yoy, 3M moving average Source: Deutsche Bundesbank 75 80 85 90 95 100 105 110 115 - 30 - 20 - 10 0 10 20 30 08 09 10 11 12 13 Merch. exports (left) ifo export expectations (lagged by 3m, right) Exports & ifo e xport expectations % yoy (left), index (right) Sources: Deutsche Bundesbank, ifo Focus Germany 17 | January 28, 2013 Current Issues Chartbook: Sectors — Industrial output has trended downwards over the last few months, especially in Q4 2012. Output probably declined by 1% in real terms in 2012. We believe that industrial output is likely to stagnate in 2013. — Order intake is below last year's level at present. Orders from other European countries, in particular, have declined markedly, while orders from outside Europe are still supportive. — Risks to manufacturing activity stem from a continuing economic downturn in major export markets. — In the last two months production level in the automotive industry was well below the average of 2012. Output probably stagnated last year. — Business expectations have deteriorated considerably in the last few months, however, showing an improvement at the latest reading. Capacity utilisati on in the auto - motive industry has fallen strongly over the past few months. — Also on account of the statistical underhang we expect output in the automotive industry to fall by 2% in real terms in 2013. — With the ongoing depletion of order - books in the c ourse of 2012, production momentum in mechanical engineering has slowed. Still, full-year output should have risen by 1.5%. — Order intakes in the mechanical engineering industry have sent mixed signals during the last few months. A gradual stabilisation of the euro area could support foreign demand in 2013. — For 2013 as a whole we expect mechanical engineering output to be flat, with output trending upwards in the course of the year as the sector will start 2013 with an underhang. — The early - cycle sectors c urrently show little signs of a major growth rebound in 2013. — Over the last few months production in the chemical industry has stabilised. In 2013 production should increase by 1.5%. — Plastics production had been trending downwards recently, but business e xpectations have improved again of late. — Output in metal production probably contracted by 3% in 2012, but it could post a marginal increase in 2013. 70 80 90 100 110 120 130 08 09 10 11 12 Orders Production 2005=100, sa Source: Federal Statistical Office Manufacturing: Output and order intake 30 40 50 60 70 80 90 100 60 70 80 90 100 110 120 130 140 08 09 10 11 12 Capacity utilisation (right) Production (left) Car industry: Output and capacity utilisation 2005=100, sa (left), capacity utilisation % (right) Sources: Federai Statistical Office , ifo 60 70 80 90 100 110 120 130 140 150 08 09 10 11 12 Production Order intake Mechanical engineering: Order intake and output 2005=100, sa Source: Federal Statistical Office 60 70 80 90 100 110 120 130 08 09 10 11 12 Chemicals Plastics Metal products and processing Production: Early cycle sectors 2005=100, sa Source: Federal Statistical Office Focus Germany 18 | January 28, 2013 Current Issues Chartbook: Financial markets (1) — We do no longer expect the ECB to cut the refi rate again in Q1 due to easing of the situation on the financial markets and first signs of economic recovery. The balance sheet reduction of about EUR 160bn since its peak could be seen as a first sign for the beginning of the exit from unconventional policy. Repayment of LTRO liquidity will reduce the balance sheet further. — Although it has become less likely recently that a country will apply for an ESM - program, the ECB will be ready to start the program of purchasing bonds under strict conditionality (Outright Monetary Transactions, OMT). — The costs of secured interbank refinancing are at a record low of around 0.15% p.a. ( - 0.9 pp yoy). — Indications that the Fed might get second thoughts about its open - ended asset purchase program have resulted in a “mini sell off” of US treasury bonds at the start of the year. — Bunds showed a similar development. The yield in - creased from 1.32 % at the be ginning of the year to 1.58 % recently. — Despite partly negative real interest rates many investors favour the “safe haven” of Germany – one of the few countries with an AAA - rating in Europe. — Intra - EMU bond yield spreads have declined markedly since th e announcement by ECB president Draghi that the ECB is ready to do whatever it takes to preserve the euro (26 July 2012 ). — Draghi highlighted on the January ECB press conference that financial market confidence improved significantly and that fragmentation has dimi ni shed. — The yield spreads of Italian and Spanish government bonds were the most sensitive to the prospect of ECB interventions (OMT). — Since the beginning of September they fell by about 200 and around 190 for Spain and Italy, respectively. — At the short end (3Y) – the focus of the bond purchasing programme – yield spreads fell by around 40% in Spain and roughly halved in Italy. 0 1 2 3 4 5 6 08 09 10 11 12 13 ECB refi rate 3M interest EMU: Refi rate & 3M Interest % Sources: ECB, Global Insight 0 1 2 3 11 12 13 German government bonds: 10Y yields % Source: Global Insight 0 20 40 60 80 100 120 140 160 180 200 11 12 13 Netherlands Finland France Austria EMU: Bond yield spreads Versus German govt. bond yield, basis points Source: Global Insight 0 100 200 300 400 500 600 700 11 12 13 Spain Italy Source: Global Insight EMU: Bond yield spreads Versus German govt. bond yield, basis points Focus Germany 19 | January 28, 2013 Current Issues Chartbook: Financial markets (2) — Currently, the DAX stands at around 7,700 points. The more optimistic assessment of the euro debt crisis sent the DAX rising further, not least because of a lack of investment alternatives in the German bond market due to negative real interest rates. The difference between dividend and bond yields is currently at a 35 - year high. — Since the beginning of the debt crisis the DAX has performed considerably better than European equities. Earnings downgrades for 2013/14 have tapered off recently. However, DAX 20 13 earnings are still expected to fall yoy, because of a one - off - factor resulting from a balance sheet effect of a big car producer. Our equity strategists have a 2013 year - end target of 8000 for the DAX and 315 for the Stoxx600. — Raw material price, in particular industrial and energy raw material price, will probably increase modestly due to a stronger growth in China – the largest importer of raw materials – and a sluggish economic recovery in the industrial countries. — The expan sionary monetary policy stance of the major central banks should keep upward pressure on prices. — Food prices increased markedly in Q3 2012 due to droughts (in the US and Eastern Europe for example) and fell markedly again, recently, but are still up by ab out 7 % yoy. — Following a weak winter half year, oil demand should increase markedly in H2 2013 thanks to the recovery of the global economy. Additionally, supply - side factors (e.g. geopolitical risks, Iran) provide some upside risks. — We expect an oil price of USD 115 per barrel Brent at the end of the year. At the moment the oil price amounts to slightly over USD 110 per barrel Brent. — The gold price should increase in the course of 2013 thanks to negative real interest rates, a weaker USD in H1 2013 and gold purchases of central banks diversifying their currency reserves. — Our commodities analysts expect a gold price of USD 2,000 per fine ounce at the end of the year. Currently, the gold price stands at around USD 1,690 per fine ounce. 0 2000 4000 6000 8000 10000 06 07 08 09 10 11 12 13 Dax 30 EuroStoxx 50 (normalised) Equity indices Sources: Global Insight, DB Research 0 20 40 60 80 100 120 140 160 08 09 10 11 12 Food Energy Total Industrial Raw material prices HWWI index, 2010=100, based on EUR Source: HWWI 0 20 40 60 80 100 120 140 160 02 06 10 USD per barrel EUR per barrel Sources: Global Insight, Reuters, DB Research Oil price Brent Blend, USD or EUR per barrel 0 200 400 600 800 1000 1200 1400 1600 1800 2000 02 06 10 USD per fine ounce EUR per fine ounce Sources: Global Insight, Reuters, DB Research USD or EUR per fine ounce Gold price Focus Germany 20 | January 28, 2013 Current Issues Chartbook: Financial markets (3) — Contrary to lingering inflation concerns in the general public the private forecasters of the ECB survey expect no increase of the EMU inflation rate in 2 years (1.9%) and neither in 5 years (2.0%). — The implied inflation rate for the next 10 years – calculated as the difference between the yield of 10 - year German government bonds and the yield of inflation - protected bonds – hovers between 2 and 2 ½% since the beginning of 2011. — However, the “implicit inflation expectation” may be biased. On the one hand the current negative real interest rate of - 1% earned on an inflation protected bond is hard to reconcile with economic considerations. On the other hand nominal bond yields are depressed by massive purchases of several major cen tral banks and still persistent flight to quality. — Since the end of July 2012 the EUR appreciated against the USD by 10% and now stands at EUR/USD 1.33. This comes as a result of a markedly lower tail risk of an EMU break - up which reduced the capital flight from EMU, improvement of the EMU current account balance, more expansive monetary policy of the Fed relative to the ECB and the uncertainty in the USA about the solution to reduce the fiscal deficits (fiscal cliff, debt ceiling). — Contrary to the Fed, the ECB is already shrinking its balance sheet. The r epayment of LTRO liquidity will speed up the balance sheet reduction resulting in upward pressure on the EUR — Our FX strategists expect a EUR/USD exchange rate of 1.35 in 3 months. — The USD should strength in H2 2013 due to the higher growth rate of the US economy of around 3%. According to our FX strategists the USD will probably appreciate to EUR/USD 1.30 in 6 month. Additionally the evolving shale gas revolution might have a mitigating effect on the US current account deficit in the medium term. -15 -10 -5 0 5 10 15 20 25 30 35 0.0 0.5 1.0 1.5 2.0 2.5 3.0 07 08 09 10 11 12 Implicit inflation expectation (left) Two years ahead* (left) Longer term* (left) Price trends over next 12 months** (right) Inflation expectations euro area % yoy (left), balance of pos. u. neg. responses (right) * ECB Survey of Professional Forecasters, ** EC Consumer Survey Sources: ECB, EU Commission, Bloomberg 0.8 0.9 1.0 1.1 1.2 1.3 1.4 1.5 1.6 80 90 100 110 120 130 02 03 04 05 06 07 08 09 10 11 12 Nom. eff. EUR - exchange rate (lhs) Real eff. EUR - exchange rate (lhs) USD per EUR (rhs) 1999Q1=100 (left), USD per EUR (right) Sources: ECB, Reuters Exchange rate development for the EUR Focus Germany 21 | January 28, 2013 Current Issues Chartbook: Financial markets (4) — The pace of growth in lending to German corporates lost further momentum in November (latest data available ). — While corporate lending in Germany (0.8% yoy) is still more expansive than in the euro area as a whole ( - 2.5% yoy), the slowdown in the economy clearly takes its toll on lending volumes. — Contraction of corporate lending in the euro area shows a further acceleration – mainly reflecting the bleak macroeconomic situation and ongoing deleveraging process in countries strongly affected by the crisis. — The second half of 2012 saw a slight increase in mortgage lending growth in Germany (November: 1.9% yoy). — Low interest rate levels and a partly buoyant housing market have so far had a limited effect on credit demand in Germany as demand is in part financed through a reallocation of existing capital. Mortgage growth has been moderate and has remained slightly below pre - crisis levels of 2007. — Still, German mortgage growth is above the euro area average; the latest spike in the euro area yoy - rate is mainly due to a drop in the pre - year period. — In November, interest rates for mortgages and loans to corporates fell to record lows since the introduction of the interest rate statistics. — Since November 2011, lending rates in G ermany have continuously fallen, in line with the lowering of the ECB’s refinancing rate. — Low yields for German bunds have allowed banks to refinance themselves at relatively low cost, which they partly passed on to clients. — In December, corporates on a verage see no problem with credit supply. — Slight decrease in the share of corporates that consider lending policies “restrictive”: manufacturing industries - 1.3 ppt compared to previous month; construction sector - 0.2 ppt. — In historical comparison, rather accommodating lending standards for the construction sector as well as for the manufacturing industries. Somewhat tighter standards for construction companies, albeit positive prospects of this sector. -8 -4 0 4 8 12 16 06 07 08 09 10 11 12 Euro area Germany Loans to companies % yoy Sources: ECB, DB Research -2 0 2 4 6 8 10 12 14 06 07 08 09 10 11 12 Euro area Germany Mortgage volumes % yoy Sources: ECB, DB Research 0 1 2 3 4 5 6 7 06 07 08 09 10 11 12 ECB main refi - rate Ø - interest rate for mortgage loans (private sector, new loans) Ø - interest rate for loans to companies (new loans, smaller than 1m) Interest rates % Sources: ECB, Bundesbank 0 10 20 30 40 50 60 09 10 11 12 Manufacturing industries Construction sector Lending standards Share of companies that consider lending policies "restrictive" (in %) Source: ifo Focus Germany 22 | January 28, 2013 Current Issues Chartbook: Financial markets (5) — Until November 2012, cumulated issuance of debt securities by the public sector in Germany has nearly reached pre - year levels (EUR 585 bn). Up to now, strong demand mainly by international investors. — In 2012, overall shift in issuance volume: Germany’s Länder in total have issued more, whereas the federal government has issued less compared to the previous year. — Overall debt servicing costs relative to GDP decreased as a result of quite favourable interest rates for the German sovereign. — Issuance volume of debt securities by banks in Germany has reached EUR 658 bn by the end of November, 7.5% above pre - year value. — Rather stable refinancing conditions of German banks compared to other euro area countries; no dependence on ECB credit. — Over several years, issu ance volume of German covered bonds (Pfandbriefe) and traditional bank bonds declined in relative terms; overall volume growth, however, was driven almost entirely by issuance of public sector development banks. — By the end of November, debt issuance by non - bank corporates reached EUR 27.7 bn, about 40% above comparable period last year; relatively strong issuance activity in November (EUR 3.3 bn) . — Continuously positive environment for corporate bond issuance: low interest rate levels, low risk premia and a search for yield by investors. — Currently, the market for corporate bonds grows faster than that for corporate lending. — Equity issuance in Germany until November with EUR 4.7 bn rather weak compared to pre - year value of EUR 20 bn. — The quite buoyant development of German equity markets in 2012 has not been able to stimulate IPOs or secondary market offerings on a broad basis. — Yet, the statistics provides a somewhat negatively distorted picture, since going public of Talanx and Telefonica Germany is no t reflected in the data (no fresh issuance of shares). 0 100 200 300 400 500 600 700 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2006 2007 2008 2009 2010 2011 2012 Issuance of public debt securities Cumulative issuance volume , EUR bn Sources: Bundesbank, DB Research 0 200 400 600 800 1,000 1,200 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2006 2007 2008 2009 2010 2011 2012 Bank debt issuance Cumulative issuance volume, EUR bn Sources: Bundesbank, DB Research 0 5 10 15 20 25 30 35 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2006 2007 2008 2009 2010 2011 2012 Non-bank corporate debt issuance Cumulative issuance volume, EUR bn Sources: Bundesbank, DB Research 0 5 10 15 20 25 30 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2006 2007 2008 2009 2010 2011 2012 Equity issuance Cumulative issuance volume, EUR bn Sources: Bundesbank, DB Research Focus Germany 23 | January 28, 2013 Current Issues Chartbook: Economic policy — By the end of 2010, Germany´s overall debt - to - GDP - ratio had jumped to nearly 83% of GDP. Almost 13% of the increase can be explained by the assistance measures for financial institutions and the Euro area. — Thanks to steadily growing GDP and redemption/sales of (financial) assets the debt - to - GDP - ratio fell back to just above 81% by the end of Q1 2012. Given the redemption/sales of assets and (at least temporarily) ne w assets in context of the Erste Abwicklungsanstalt (former WestLB bad bank) first estimates show that the debt - to - GDP - ratio raised to round about 82% by the end of 2012. Therefore increased debt - to - GDP ratio is primarily because of growing Länder debt (es pecially in North - Rhine Westphalia). — The razor - thin victory for SPD and the Greens in Lower Saxony will change voting majorities in the Bundesrat (the second chamber represents the Länder [federal states]). The legislative process requires for numerous important bills (e.g. tax policy) to pas s through Bundes - tag and Bundesrat. Together with the Left Party (coalition of SPD/Left Party in Brandenburg) the SPD and the Greens can now count on a majority (36) in the Bundesrat. De facto there will be no major changes in the legislative process befor e next federal elections in autumn this year. The current coalition of CDU and FDP had already previously no majority in the Bundesrat due to several CDU/SPD coalition Länder governments. But if it comes to a change of government after federal elections S PD and Greens could count on comfortable majorities in both chambers allowing them to pass bills easily (assuming – according to current polls – that elections in Hesse will also change government, SPD and Greens would even need no longer support by the Le ft Party). — — — Allensbach survey on political sentiment in Germany (‘Sonntagsfrage’) delivered continuously improving rates for the CDU/CSU parties, and the FDP is also able to surpass the 5% threshold. With a total of 44% of the votes (which is more than in the past two years) they are ahead of SPD and Greens. The latter is a result of deteriorating survey results of the SPD and the bad start of the candidate for chancellor Peer Steinbrück. Even the elections in Lower Saxony won´t change much about th is development at the federal level. 0 10 20 30 40 50 60 70 80 90 05 06 07 08 09 10 11 12 Federation Federal States Municipalities General government debt % of GDP, Maastricht - Figures, end of quarter Sources: Deutsche Bundesbank, DB Research Distribution of seats in the Bundesrat 60 seats in all Source: Bundesrat 0 5 10 15 20 25 30 35 40 45 Sep 2009 Oct 2011 Nov Dec Jan 2012 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan 2013 Conservative Party Social Democrats Liberal Party Greens Left Party Pirates 14 28 7 5 39 3 Election 2009 Deutscher Bundestag, if there were elections tomorrow 2009 election results, 2011 onwards survey results, % Source: IFD Allensbach Focus Germany 24 | January 28, 2013 Current Issues Contact persons for our chartbooks: Business cycle and financial markets: Heiko Peters (+49 69 910-21548, heiko.peters@db.com) Oliver Rakau (+49 69 910-31875, oliver.rakau@db.com) Jan Schildbach (+49 69 910-31717, jan.schildbach@db.com) Sectors: Antje Stobbe (+49 69 910-31847, antje.stobbe@db.com) Economic policy: Dieter Bräuninger (+49 69 910-31708, dieter.braeuninger@db.com) Frank Zipfel (+49 69 910-31890, frank.zipfel@db.com) Dieter Bräuninger (+49 69 910-31708, dieter.braeuninger@db.com) Nicolaus Heinen (+49 69 910-31713, nicolaus.heinen@db.com) Germany: Events of economic-, fiscal- and euro-politics Date Event Remarks 7 Feb Meeting of the ECB Council, press conference Review of the monetary policy stance. We do not expect any changes to the main refinancing rate. 7/8 Feb European Council in Brussels Debate/agreement on the EU long - term financial framework 2014 - 2020. Debate on trade relations and on foreign relations especially with the countries of the Southern neighbourhood. 11/12 Feb ECOFIN and Eurogroup in Brussels Financial and macroeconomic stability developments in the euro area, including monitoring of individual Member States, Economic situation in the euro area – broad outline of the Commission winter forecast. 15/16 Feb G20 finance ministers and central bank governors in Moscow Debates on regulation of financial markets and shadow banking. 4/5 Mar ECOFIN and Eurogroup in Brussels Second review of Greece adjustment programme; second review of Spanish financial sector programme; EDP implications of the Commission winter forecast. 7 Mar Meeting of the ECB Council, press conference Review of the monetary policy stance. We do not expect any changes to the main refinancing rate. 14/15 Mar European Council in Brussels EU leaders agree on common economic policy principles and reform goals for 2013 4 Apr Meeting of the ECB Council, press conference Review of the monetary policy stance. We do not expect any changes to the main refinancing rate. 11/12 Apr ECOFIN and Eurogroup in Ireland Seventh review of Portuguese adjustment programme; ninth review of Irish adjustment programme; stability and growth pact implementation for euro area countries 18/19 Apr G20 finance ministers and central bank governors in Washington Debate on the situation of international financial system. 19/20 Apr Spring meetings of IMF and World Bank in Washington Source: DB Research Focus Germany 25 | January 28, 2013 Current Issues Heiko Peters (+49 69 910-21548, heiko.peters@db.com) Oliver Rakau (+49 69 910-31875, oliver.rakau@db.com) Germany: Data calendar Date Time Data Reporting period DB forecast Last value 31 Jan 2013 0 8:00 Import prices (Index, sa) pch mom (yoy) Dec 0.4 (1.3) 0.0 (1.1) 31 Jan 2013 14:00 Consumer prices preliminary (Index, sa), pch mom (yoy) Jan - 0.3 (2.1) 0.9 (2.1) 31 Jan 2012 10:00 Unemployment rate (%, sa) Jan 6.9 6.9 31 Jan 2013 0 8:00 Retail sales (Index, sa), pch mom Dec 0.5 0.9 8 Feb 2013 0 8:00 Trade balance (EUR bn, sa) Dec 15.7 15.1 8 Feb 2013 0 8:00 Merchandise exports (EUR bn, sa), pch mom (yoy) Dec 1.1 (5.2) - 2.5 (0.0) 8 Feb 2013 0 8:00 Merchandise imports (EUR bn, sa), pch mom (yoy) Dec 0.7 (2.7) - 3.7 ( - 1.0) 6 Feb 2013 12:00 New orders manufacturing (Index, sa), pch mom Dec - 0.5 - 1.8 7 Feb 2013 12:00 Industrial production (Index, sa), pch mom Dec 0.0 0.2 14 Feb 2013 0 8:00 Real GDP (Index, sa), % qoq Q4 2012 - 0.5 0.2 21 Feb 2013 0 9:30 Manufacturing PMI (Flash) Feb 49.5 48.8 21 Feb 2013 0 9:30 Services PMI (Flash) Feb 55.5 55.3 22 Feb 2013 10:30 ifo business climate (Index, sa) Feb 105.0 104.2 Sources: DB Research, Federal Statistical Office, Federal Employment Agency, ifo, Markit Financial Forecasts US JP EMU GB CH SE DK NO PL HU CZ Key interest rate, % Current 0 - 0.25 0 - 0.1 0.75 0.50 0.00 1.00 0.20 1.50 4.00 5.75 0.05 3M 0 - 0.25 0 - 0.1 0.75 0.50 0.00 1.00 0.20 1.50 3.50 5.25 0.05 6M 0 - 0.25 0 - 0.1 0.75 0.50 0.00 1.00 0.25 1.75 3.50 4.75 0.05 12M 0 - 0.25 0 - 0.1 0.75 0.50 0.00 1.00 0.30 2.00 3.25 4.50 0.05 3M interest rates, % Current 0.31 0.30 0.22 0.51 3M 0.35 0.30 0.20 0.55 6M 0.35 0.30 0.20 0.60 12M 0.35 0.30 0.30 0.70 10J government bonds yields Yields, % Spreads vs. EMU, pp Current 1.99 0.76 1.68 2.11 - 0.94 0.22 0.07 0.87 3M 2.50 0.80 1.70 2.20 - 0.95 0.05 - 0.30 0.85 6M 2.50 0.80 1.90 2.50 - 0.90 0.20 - 0.25 0.90 12M 2.50 0.90 2.25 3.10 - 0.85 0.30 - 0.20 1.00 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 1.34 91.05 0.85 1.57 1.25 8.70 7.46 7.44 4.18 298.40 25.70 3M 1.35 91.00 0.85 1.61 1.25 8.50 7.46 7.25 4.05 280.00 25.00 6M 1.30 92.00 0.85 1.56 1.25 8.20 7.46 7.10 3.98 280.00 24.50 12M 1.20 95.00 0.83 1.49 1.25 8.00 7.46 6.95 3.84 280.00 23.80 Sources: Bloomberg, Deutsche Bank Focus Germany 26 | January 28, 2013 Current Issues German Data m onitor Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012 Aug 2012 Sep 2012 Oct 2012 Nov 2012 Dec 2012 Jan 2013 Business surveys and output Aggregate Ifo business climate 107.0 109.2 107.2 102.3 101.3 102.2 101.4 100.0 101.5 102.4 104.2 Ifo business expectations 98.0 101.9 100.1 94.3 95.5 94.1 93.2 93.3 95.3 98.0 100.5 PMI composite 50.3 52.9 49.3 47.9 49.1 47.0 49.2 47.7 49.2 50.3 53.6 Industry Ifo manufacturing 102.4 104.4 102.5 96.4 95.0 97.0 95.6 94.2 94.6 96.3 99.0 PMI manufacturing 48.5 49.9 45.5 45.0 46.3 44.7 47.4 46.0 46.8 46.0 48.8 Headline IP (% pop) - 1.6 - 0.4 0.0 0.9 - 0.4 - 1.2 - 2.0 0.2 Orders (% pop) - 2.4 - 0.7 0.5 - 2.0 - 0.8 - 2.4 3.8 - 1.8 Capacity u tilisation 85.6 85.1 85.0 83.7 82.1 Construction Output (% pop) 0.4 - 3.7 3.3 1.0 - 2.2 2.5 - 1.6 1.0 Orders (% pop) 0.6 9.2 - 5.6 - 1.7 5.6 - 7.8 22.8 - 20.5 Ifo construction 117.2 123.1 120.0 118.0 117.6 118.6 116.7 115.7 118.3 118.7 122.6 Services PMI services 51.1 52.9 51.3 49.4 50.0 48.3 49.7 48.4 49.7 52.0 55.3 Consumer demand EC consumer survey - 2.8 - 0.3 - 1.1 - 7.9 - 10.0 - 8.8 - 10.3 - 9.3 - 10.2 - 10.4 Retail sales (% pop) 0.1 - 0.4 0.1 - 0.8 - 0.5 0.0 - 0.6 0.9 New car reg. (% yoy) 3.0 1.3 0.2 - 7.0 - 6.2 - 4.7 - 10.9 0.5 - 3.5 - 16.4 Foreign sector Foreign orders (% pop) - 1.7 - 0.7 1.1 - 1.3 0.0 - 2.9 6.6 - 4.1 Exports (% pop) - 1.2 2.4 1.8 1.4 2.2 - 2.5 0.1 - 2.5 Imports (% pop) - 1.2 1.3 - 0.2 0.3 0.3 - 0.9 2.9 - 3.7 Net trade (sa EUR bn) 39.5 43.2 48.4 51.5 18.4 16.6 14.6 15.1 Labour market Unemployment rate (%) 6.9 6.8 6.8 6.8 6.9 6.8 6.8 6.9 6.9 6.9 Change in unemployment (k) - 39.3 - 38.7 18.0 22.7 34.0 10.0 11.0 19.0 5.0 3.0 Employment (% yoy) 1.4 1.4 1.2 1.0 1.0 0.9 0.7 0.6 Ifo employment barometer 108.5 108.5 107.8 106.5 106.3 106.6 106.3 105.6 106.4 106.9 Prices, wages and costs Prices Harmonised CPI (% yoy) 2.6 2.4 2.1 2.1 2.0 2.2 2.1 2.1 1.9 2.1 Core HICP (% yoy) 1.3 1.3 1.4 1.2 1.3 1.2 1.2 1.2 1.2 1.5 Harmonised PPI (% yoy) 4.8 3.3 2.0 1.4 1.5 1.6 1.7 1.5 1.4 1.5 Commodities, ex. Energy (% yoy) - 5.8 - 9.6 - 7.8 - 4.5 0.7 - 4.2 - 6.2 - 0.3 1.5 1.1 Oil price (USD) 109.4 118.4 108.2 109.7 110.1 113.5 113.1 111.8 109.2 109.4 Inflation expectations EC household survey 30.3 28.3 25.0 27.0 31.2 26.8 29.3 31.2 31.2 31.2 EC industrial survey 9.0 10.0 6.4 0.8 2.9 1.0 1.1 2.1 2.1 4.6 Unit labour cost (% yoy) Unit labour cost 2.4 2.0 2.8 3.2 Compensation 2.7 2.2 2.4 2.5 Hourly labour costs 3.8 1.7 2.7 4.1 Money (% yoy) M3 5.9 7.0 7.1 6.4 7.6 6.4 9.6 8.3 8.3 M3 trend (3m cma) 7.6 7.9 8.1 8.8 8.3 Credit - private 1.9 2.1 0.7 0.6 1.0 0.6 - 0.2 - 0.6 Credit - public - 21.3 13.5 22.0 10.4 26.8 10.4 12.1 4.3 % pop = % change this period over previous period. Sources: Deutsche Bundesbank, European Commission, Eurostat, Federal Employment Agency, German Federal Statistical Office, HW WI, ifo, Markit Focus Germany 27 | January 28, 2013 Current Issues Current Issues Our publications can be accessed, free of charge, on our website www.dbresearch.com You can also register there to receive our publications regularly by E - mail. Ordering address for the print version: Deutsche Bank Research Marketing 60262 Frankfurt am Main Fax: +49 69 910 - 31877 E - Mail: marketing.dbr@db.com Available f aster by E - mail: marketing.dbr@db.com  Two years of Arab Spring: Where are we now? What’s next? ............................. January 25 , 201 3  FATCA & Intergovernmental Agreements: Automatic exchange of information on taxes on the rise ................................ ......................... January 16, 201 3  Medical technology: Electromedicine driving healthcare ............................. January 16, 201 3  More value creation through knowledge (assets): Implications for regional growth strategies .................... January 7, 201 3  Germany at the polls: The 2013 elections and the future of the euro .............. January 4, 201 3  The future of (mobile) payments: New (online) players competi ng with banks ............ December 20, 201 2  Focus Germany: German business cycle at the turning point? ................................ .................. December 3, 201 2  Universal banks: Optimal for clients and financial stability ................................ ...................... November 20, 201 2  GCC financial markets: Long - term prospects for finance in the Gulf region ................................ ........ November 14, 201 2  F oreign investment in farmland: No low - hanging fruit ................................ ................ November 13, 201 2  Focus Germany: Euro crisis brings economy to a standstill in the winter half ................................ ........................ November 2, 201 2  German industry: Only moderate recovery in 2013 ................................ ................................ ......... October 19, 201 2  Fiscal policy in US states ................................ .......... December 8, 2011  Germany: St. Nicholas and Knecht Ruprecht ................................ ........................ December 5, 2011  China’s financial integration into the world economy: Scrutinising China’s international investment position ................................ .................. November 23, 2011  In search of growth ................................ .................. November 15, 2011  Brazil’s public sector finances: Everything you always wanted to know about Brazil’s public debt (but were afraid to ask) ................................ .............. November 7, 2011  German industry: Pronounced slowdown ................. November 4, 2011  Opportunities for the retail secto r ................................ .. October 4, 2011 © Copyright 2013. Deutsche Bank AG, DB Research, 60262 Frankfurt am Main, Germany. All rights reserved. When quoting please cite “Deutsche Bank Research”. The above information does not constitute the provision of investment, legal or tax advice. Any views expressed reflect the current views of the author, which do not necessarily correspond to the opinions of Deutsche Bank AG or its affiliates. Opinions expressed may change without notice. Opinions expressed may differ from views set out in other documents, including research, published by Deutsche Bank. The above information is provided for informational purposes only and without any obligation, whether contractual or otherwise. 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