Deutsche Bank

Annual Report 2017

The Global Economy

For 2018, we believe global economic growth will remain robust. We expect global GDP to grow to 3.9 %, slightly above the 2017 growth rate, supported by several industrialized countries achieving and sustaining close to full employment. The improved economic environment should support higher asset prices, especially for commodities. The global inflation rate is forecasted to be 3.3 % in 2018, 0.4 % above the rate in 2017. For industrialized countries, we expect GDP growth to accelerate to 2.2 %, and consumer prices to increase by 1.7 % in 2018. Economic growth in the emerging markets is projected to rise slightly to 4.9 % in 2018 while inflation in emerging markets is expected to rise to 4.3 %, from 3.8 % in 2017.

In the Eurozone, we expect GDP growth to remain at 2.3 %. In 2018, inflation is expected to remain below 2 % as the output gap is shrinking only slowly. German wage agreements could put pressure on prices. However, inflation should remain low in the coming years. We believe the ECB net asset purchase program will end in 2018, and we expect the first ECB policy rate hike by mid-2019. Political risks could arise from the Italian parliamentary elections in March, as Eurosceptic parties remain popular. Following 2017 GDP growth of 2.2 %, we expect the German economy to expand by 2.3 % in 2018, driven almost solely by domestic demand.

In the U.S., economic growth is forecasted to accelerate to 2.9 % in 2018 supported by modest positive impulses for companies and households from the U.S. tax reform as well as the recent adoption of the budget agreement providing for nearly U.S.$ 300 billion in additional discretionary spending in fiscal years 2018 and 2019. This combined with repatriation tax incentives may lead to a pick-up in demand, a tighter labor market with potentially higher wages, and increased investment activity. This could lead to higher inflation, however partially offset by anticipated interest rate hikes by the Federal Reserve in 2018. Accordingly, we expect inflation rate to remain slightly above 2 %, as in 2017.

The growth rate of the Japanese economy is expected to slow to 1.2 %. We expect both the domestic and the external sector to contribute to GDP growth. Inflation should remain essentially flat at 0.4 %. The Bank of Japan is focused on managing the yield curve and we do not expect interest rate adjustments in 2018. In 2018, economic growth in emerging markets is projected to rise slightly to 4.9 %, and in Asia (excluding Japan) to be 6.0 %. Inflation in emerging markets is expected to rise to 4.3 %, from 3.8 % in 2017. In 2018, the Chinese economy is forecasted to slow moderately to 6.3 %, the lowest growth rate since 1990. The slowdown is expected to be driven by government policies encouraging a deleveraging process. The tightening of Chinese monetary, fiscal, and property market policies is expected to continue in 2018. Inflation is expected to increase to 2.7 %.

The uncertainty in our global forecast remains relatively high as the heat-map of global risks is more or less unchanged since 2017. An early recession in the U.S. due to changes in the structure of the yield curve, populist movements in Europe as well as geopolitical risks, particularly in the Middle East could potentially have a substantial adverse effect on our forecasts. Also, with at best a transitional deal in the near term, the risks of the exit of the UK from the European Union (Brexit) might not easily or quickly dissipate. However, if one of these risks materialize, we expect the impact on the economy and the financial markets to be lower than it would have been in previous years, since the higher economic momentum should have a dampening effect. Inflation risks which remained muted for several years have reappeared and represent a significant economic risk. A faster than expected pick-up could surprise markets and lead to a sharp repricing of central bank rate rise expectations, which could be disruptive for risk assets – akin to 2013’s taper tantrum triggered by the Federal Reserve’s communication at the time. In China, the cooling of the housing market due to deleveraging could have an impact on economic growth. We expect some policy easing in mid-2018 to support growth. However, if inflation rises substantially the Chinese economy could slow down and weigh on global growth.