DZ BANK Research Outlook for 2017

Fiscal policy will stimulate the global economy, but growth will remain fragile / central banks not more expansionary / stock markets with moderate upside potential

The global economy will only slowly pick up pace in 2017. It will be bolstered by increasing fiscal-policy stimuli. Inflation will edge up above all owing to the energy-price-related baseline effect. Thus, there will be no talk of an even more expansionary monetary policy. Interest rates will remain very low, especially in the Eurozone. The existing lack of appealing investment opportunities in combination with the global economy’s slightly brisker growth will also boost the stock markets. The DAX should close 2017 at around 12,000 points.

The global economy is estimated to grow by 3.0 percent in the coming year, whilst 2.8 percent is expected in the current year. Growth worldwide continues to not be very dynamic. Some countries will try and use fiscal programmes to counter this. This will include the USA with its new president, although the impact there will only gradually be felt as of second-half 2017.Globally, growth will remain fragile owing to the countless geopolitical risks. Political issues and the actions of the central banks will continue to outweigh the economic fundamentals.

Political risks depress sentiment, but growth remains very robust

In this context, the Eurozone’s existing restrained economic cycle will cool even further. The gross domestic product (GDP) is expected to grow by 1.2 percent, as against 1.5 percent in 2016. The pending Brexit negotiations, the results of the US elections, and increasing populism in Europe all weigh heavy on sentiment. This will be negatively reflected in 2017 in the economic climate and the growth figures. Given the great uncertainties, economic conditions in Europe remain very robust, however. This is especially true of the German economy, which is driven by stable domestic demand. Although the forecast for 2017 GDP growth in Germany is now only 1.2 percent (2016: 1.8 percent), about 0.3 percentage points of this decrease can be attributed to the lower number of working days in that year.

It is muddled thinking by the increasing number of countries in Europe, too, that respond to the modest growth prospects by launching fiscal programmes. Large-scale government spending programmes will be a flash in the pan that will set back what is already stuttering budget consolidation in many EMU member states. Instead of fiscal programmes, they should definitely resort to further structural reform, in particular in the job markets. Unfortunately, at the moment things seem to be swinging the other way, in Germany too.

Inflation edges up – ECB monetary policy not set to tighten before 2018

Given the dampened growth and a structurally weak demand trend, inflation will only rise modestly. In Euroland, the rate will thus be 1.1 percent in the coming year and thus remain well below the European Central Bank’s (ECB) two-percent target. In the USA, the figure will be higher at 2.3 percent in 2017, but that year will not yet really be defined by the plans of future President Trump.

Against this backdrop, monetary policy is likely to differ increasingly on the two sides of the Atlantic. We expect that the Fed will raise key lending rates as early as December. By the end of 2017 the Fed Funds Target Rate could rise in two further steps to 1.25 percent. The ECB will continue to leave the key lending rate and the deposit rate at a low level. It will press ahead for the time being with its Asset Purchase Programme (APP) with a current monthly volume of 80 billion Euros. The central banks will, however, at least not opt for more expansionary measures. Today already, the efficacy of Europe’s current monetary policy is more than questionable, and the negative consequences hard to estimate. The ECB will presumably introduce tapering around the middle of the coming year and then implement it calmly in 2018.

Stock markets with modest upside potential

The further development of the stock markets can be viewed with cautious optimism. The DAX can be confidently expected to reach 12,000 points by the close of 2017. This corresponds to an upside of about 12 percent on the current figure. The slight pick-up in the global economy will push up the profits of the strongly export-oriented corporations listed on the DAX. This delivers an upside. Moreover, there are still hardly any attractive alternatives at present to investments in equities.


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