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December 21, 2016
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. 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. [more]
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 barbara.boettcher@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 Editor Stefan Schneider Deutsche Bank AG Deutsche Bank Research Frankfurt am Main Germany E-mail: marketing.dbr@db.com 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 -25 -20 -15 -10 -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 3 | December 21, 2016 Focus Germany 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 -3 -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 4 | December 21, 2016 Focus Germany 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 5 | December 21, 2016 Focus Germany 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 6 | December 21, 2016 Focus Germany 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 Sources: Bertelsmann Foundation 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 Sources: Bertelsmann Foundation Of those respondents that see globalisation as an opportunity, % Political attitude to stance on globalisation in EU II 11 Outlook 2017 7 | December 21, 2016 Focus Germany 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 8 | December 21, 2016 Focus Germany 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 9 | December 21, 2016 Focus Germany 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 10 | December 21, 2016 Focus Germany 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 Sources: Federal Statistical Office, Deutsche Bank Research 75 100 125 150 175 200 05 07 10 13 16 Residential construction Commercial construction Public construction New orders 21 2010=100, swda Sources: Federal Statistical Office, Deutsche Bank Research - 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 11 | December 21, 2016 Focus Germany 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 12 | December 21, 2016 Focus Germany 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, barbara.boettcher@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) 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 13 | December 21, 2016 Focus Germany 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 discrepanc ies 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 14 | December 21, 2016 Focus Germany 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 Heiko Peters (+49 69 910-21548, heiko.peters@db.com) 4 See for details Focus Germany. August 4, 2014. Last 20 published economic data for Germany DX Bloomberg TickersIndicator Reporting month Publication date Current value Bloomberg consensus Surprise Standardised surprise Quantile rank GRCAEU IndexCurrent Account Balance (EUR bn)9 201608/11/1624.424.5-0.1-0.40.3 GRIPIMOM IndexIndustrial production (% mom)9 201608/11/16-1.6-0.5-1.1-0.90.2 GRCP20YY IndexCPI (% yoy)10 201611/11/ GRZEWI IndexZEW Survey Expectations11 201615/11/1613. GRZECURR IndexZEW Survey Current Situation11 201615/11/1658.861.6-2.8-0.50.2 GRIFPBUS IndexIFO Business Climate11 201624/11/16110.4110.5-0.1-0.20.4 GRGDPPGQ IndexGDP (% qoq)9 201624/11/ GRIMP95Y IndexImport Price Index (% yoy)10 201629/11/16-0.6- GRFRIAMM IndexRetail Sales (% mom)10 201630/11/ GRUECHNG IndexUnemployment Change (000's mom)11 201630/11/16-5.0-5.00.0-0.20.4 MPMIDEMA IndexMarkit Manufacturing PMI11 201601/12/1654.354.4-0.1-0.10.3 MPMIDESA IndexMarkit Services PMI11 201605/12/1655. GRIORTMM IndexFactory Orders (% mom)10 201606/12/ GRIPIMOM IndexIndustrial production (% mom)10 201607/12/160.30.8-0.5-0.40.3 GRCAEU IndexCurrent Account Balance (EUR bn)10 201609/12/1618.422.0-3.6-1.40.1 GRZECURR IndexZEW Survey Current Situation12 201613/12/1663.559. GRCP20YY IndexCPI (% yoy)11 201613/12/ GRZEWI IndexZEW Survey Expectations12 201613/12/1613.814.0- MPMIDESA IndexMarkit Services PMI12 201615/12/1653.854.9-1.1-1.20.1 MPMIDEMA IndexMarkit Manufacturing PMI12 201615/12/1655.554. 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 Outlook 2017 15 | December 21, 2016 Focus Germany 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 Heiko Peters (+49 69 910-21548, heiko.peters@db.com) 5 See for details Focus Germany, March 3, 2016. Outlook 2017 16 | December 21, 2016 Focus Germany Dieter Bräuninger (+49 69 910-31708, dieter.braeuninger@db.com) Heiko Peters (+49 69 910-21548, heiko.peters@db.com) Oliver Rakau (+49 69 910-31875, oliver.rakau@db.com) 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, B russels 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 Mer chandise 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 17 | December 21, 2016 Focus Germany 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 18 | December 21, 2016 Focus Germany 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 u tilisation 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 Mo ney (% 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, HW WI, ifo, Markit dbS tandpunkt 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 Mai n Fax: +49 69 910 - 31877 E - m ail: marketing.dbr@db.com Available faster by E - mail: marketing.dbr@db.com In “ db Standpunkt ” we analyse and comment on financial and economic issues, raise awareness of the key issues and contribute to the discussion. Through dbStandpunkt , we aim to cut through the day - to - day noise and focus on the key strategic questions faced by Germany in the 21st century.  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 © Copyright 2016. Deutsche Bank AG, Deutsche Bank 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. No warranty or representation is made as to the correctness, completeness and accuracy of the information given or the assessments made. 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