Deutsche Bank

Annual Report 2016

The Global Economy

We expect global economic growth to see a moderate increase to 3.5 % in 2017, after only having achieved a growth rate of 3.0 % in 2016, its weakest increase since the global financial crisis in 2009. We anticipate that the global inflation rate will likely accelerate to 5.2 % in 2017, primarily due to the upswing in commodity prices. For industrialized countries, we expect growth to accelerate to 1.9 %, and consumer prices to increase by 1.6 % in 2017. We expect economic growth in the emerging markets to increase to 4.6 % in 2017, with inflation at 7.8 %.

The economic outlook for the eurozone remains challenging, and we anticipate GDP growth to slow to 1.3 % in 2017. The upcoming key elections in major EU Member States and the related uncertainty may inhibit growth in the first half of 2017. Assuming that the political risks will not materialize, we expect the economy to gain momentum in the second half of 2017 following a significant upswing in the U.S. economy, potential fiscal easing and the supportive monetary policy stance of the European Central Bank (ECB). In December 2016, the ECB announced that it was extending its asset purchase program by nine months through to the end of 2017. Though, it plans to reduce its monthly purchases to € 60 billion from April 2017. We anticipate consumer prices to rise by 1.4 % in 2017. After 2016 GDP growth of 1.9 %, we expect the German economy to expand by 1.1 % in 2017, driven solely by the domestic economy. Approximately half of the slowdown will be due to the fact that there are fewer working days.

We expect economic growth in the U.S. to accelerate to 2.6 % in 2017. We expect the dampening effect of low oil prices on the energy sector, inventory reduction and growth-hampering net exports to gradually subside as the trade deficit has widened recently. The combination of tax cuts, deregulation and infrastructure investments announced by the new administration in the U.S. could boost growth significantly, particularly in the second half of 2017. We expect consumer prices to rise by 2.1 %. The Federal Reserve's monetary policy should provide further stimulus for the U.S. economy overall. We expect that the Fed will hike its policy rate three times to 1.375 % by year-end 2017.

We expect the Japanese economy to be driven primarily by domestic growth in 2017 and it appears to expand at a slightly quicker pace than in the prior year at 1.1 %. We anticipate that this should continue to be buoyed by the country's monetary policy. The Bank of Japan is focused on controlling the yield curve, and the pace of monetary expansion is expected to slow. We expect inflation to be at 0.6 %. We project economic growth in the emerging markets to rise to 4.6 % in 2017 and that in Asia (excluding Japan) to remain more or less flat at 5.9 % with inflation at 3.0 %. We expect the Chinese economy to expand by just 6.5 % in 2017, with inflation increasing to 2.5 %. However, this assumes an additional rise in lending, which adds to the risk of a real estate bubble and rising capital outflows. The People's Bank of China could expand the supply of credit to bolster the real estate sector. We do not expect it to adjust its key interest rate in 2017.

The inherent uncertainty in our global forecast remains relatively high due to numerous risks. The reaction of the global financial markets could be far more negative than assumed if the upswing anticipated from the new U.S. administration fails to meet expectations or if it reverts to protectionist policies. On the other hand, an upturn in the U.S. economy could cause interest rates to rise more sharply than assumed. This could have a negative impact on households and corporate expenditure worldwide and could result in much higher capital outflows from emerging markets. Likewise, a hard landing in China could trigger global upheaval. Moreover, geopolitical risks could escalate, especially those arising from conflicts in the Middle East. In Europe, an unstructured exit of the United Kingdom from the European Union, a flare-up in the debate on monetary policy going forward and the future of the eurozone, a halt in implementing structural reforms or increasing support for populist parties could potentially have a substantial adverse effect on our forecasts. Regional independence efforts remain a challenge for the stability of the European Union. Also, another refugee crisis could further exacerbate the political discord in the European Union.