Macroeconomic climate

The pace of growth in the world economy picked up appreciably in 2017. It reached 3.8% (previous year: 3.2%), the sharpest increase since 2011. The revival already began to set in towards the end of 2016 after a softer phase and continued to gather momentum into the late summer. As the year drew to a close, the relevant indicators pointed to a consolidation of the upward cyclical trend in virtually all the major national economies.

After posting moderate growth at the start of the year, manufacturing in the advanced economies expanded vigorously – especially in the six months of summer. The uptick in capital spending was crucial to the strengthening of the underlying economic trend. Consumer demand from private households, which for some time now has remained stable on a high level, was a further factor here. In Japan total economic output continued to rise on the back of a boost from exports. The Eurozone economy similarly sustained its expansion. The upward trend in manufacturing output in the United Kingdom was comparatively modest.

Economic growth in emerging markets also gained added impetus in 2017, after softer increases in the previous years. A key reason here is the recovery in output in commodity-exporting countries, which had suffered heavily in 2015 and 2016 under the collapse in commodity prices and profited in 2017 from significantly higher price levels. Brazil, for example, emerged from its recession. Manufacturing output in Russia, too, trended sharply higher again despite the impacts of sanctions imposed by western industrial nations. In China the pace of economic expansion slowed only marginally, even though the government scaled back its monetary stimuli and despite waning credit growth.

United States

In the US the geopolitical risks that many market players had linked to the new administration were relegated to the sidelines. By the second quarter the economy was already making the most of the generally good framework conditions and substantially boosted its growth rate. Over the year as a whole US manufacturing output rose by 0.8 percentage points to 2.3% on the back of normal capacity utilisation. Unemployment continued to fall year-on-year to 4.4%, a low point last seen at the turn of the millennium. Consumer prices climbed 2.1%, a sharper rise than in the previous year. Looked at in context, however, the price trend remains muted.

Europe

The Eurozone economy sustained its upward trend in 2017: the growth rate improved on the previous year by 0.6 percentage points to 2.4%. The expansion was still driven largely by domestic economic forces. Capital expenditure was once again significantly higher. Yet private consumption also continued to grow at a robust pace on the back of stronger employment and rising wages. Government spending, on the other hand, was down slightly on the previous year.

What is pleasing from the macroeconomic perspective is the fact that the economy is now on a clearly upward track in all the countries across the Eurozone. This is borne out by the currently broad-based nature of the expansion. The three crisis-hit countries of Portugal (+2.6%), Italy (+1.6%) and Greece (+1.4%), for example, consolidated their growth in 2017. The UK economy posted softer growth year-on-year of 1.5% on the back of lower consumer spending.

The state of the labour market continued to improve. The average jobless rate in the Eurozone retreated by 0.9 percentage points relative to the previous year to stand at 9.1%. Greece and Spain nevertheless continue to struggle with very high levels of unemployment. Consumer prices rose by 1.4 percentage points year-on-year to 1.6%, thus approaching the ECB’s 2% target.

Germany

For the fifth year in succession the German economy sustained its upswing of the past four years in 2017. A vigorous start to the year was followed by a further acceleration in the pace of economic growth in the subsequent months, boosting gross domestic product – before working days adjustment – by 2.3% (1.9%). Since entering the boom of the years 2006 / 2007 the German economy recorded stronger growth than in the first three quarters only in the context of the catch-up effects following the great economic slump at the beginning of the previous decade. In view of the very healthy cyclical demand, production capacity utilisation continued to increase and numerous sectors reached their capacity limits. Capacity utilisation remained exceptionally strong in the construction industry.

Private consumption continued to play a large part in the favourable economic trend. It benefited from the favourable state of the labour market, rising real wages and low oil prices. The sustained low level of interest rates also stimulated spending by private households.

The export sector showed further vigorous growth, increasing by 4.3% in 2017 (2.6%). While exports to the Eurozone and Asia expanded, they contracted to the rest of Europe and the United States. Imports increased at a rate of 4.8% (3.9%).

The jobless rate in 2017 fell to 5.7% (6.1%) and continues to trend lower. The number of persons employed domestically rose by more than 550,000. The inflation rate for Germany measured by the consumer price index stood at 1.7% in December 2017 (0.5%).

Asia

Growth in Asia remained brisk in 2017 at 6.4% (6.8%). In China the pace of growth slowed only marginally to 6.8% – despite the fact that the Chinese government substantially scaled back its monetary stimuli in the year just ended. Gross domestic product in the third quarter of 2017 was 6.8 percent higher than a year before and still came in somewhat above the target set by the government. The fact that growth remained on track was also due in part to the country’s further expansion of its foreign trade. The problem of structural indebtedness affecting businesses and private households remained very widespread.

In India the rise in output slowed appreciably, falling by 1.4 percentage points year-on-year to 6.4%. Nevertheless, experts consider this to be a temporary effect of the cash reform implemented at the end of 2016 and the introduction of a national Goods & Services Tax. Over the longer term both measures are likely to promote economic growth. Expansion was similarly sustained in the other emerging economies of Southeast Asia. The four national economies of Indonesia, Thailand, Malaysia and the Philippines grew by an average of 5.2% (4.8%).

Gross domestic product in Japan increased by 1.8% year-onyear (0.9%). The export sector played a major role here. Capital spending also picked up appreciably compared to the previous year. Private households, whose expenditures on consumption account for some 60% of the country’s economic output, cast aside some of their caution and also boosted their spending.

Capital markets

The investment climate remained challenging in the reporting period and was exposed to numerous potentially unsettling influencing factors. After the surprising outcomes of the Brexit referendum and the US elections in 2016, many feared further sources of unrest for the year under review such as France or the Netherlands moving to leave the EU or the Eurozone. These concerns proved unfounded, however, and even real factors such as the overhaul of international trade agreements and the sluggish progress in forming a government in Germany had little impact on financial markets, which proved to be astonishingly robust and in the case of the Eurozone even surprisingly sprightly. US markets continued to be fuelled by the hope of effective growth incentives from the Trump administration. Towards the end of the year these then materialised with astonishing speed in the form of a major package of tax reforms. In many emerging nations the economy continued to stabilise as the year progressed, while China largely dispelled the doubts about its economic strength that had arisen in the previous year. What is more, markets continued to appear thoroughly crisis-proof in view of the large amount of available liquidity, as a consequence of which the world economy as a whole recorded its strongest year since 2010.

The ECB announced that it would reduce its monthly purchases of corporate bonds but at the same time extend the programme until September 2018. This demonstrates the balancing act that the ECB has to perform in order to avoid giving the impression of an overly brash exit from its support programme while simultaneously demonstrating decisiveness and a willingness to act. All in all, the policy pursued by central banks in our main currency areas was inconsistent. The ECB left the key interest rate for the Eurozone at a historically low 0.00%, whereas the Bank of England raised the prime rate for pound sterling for the first time since 2007 to 0.5% and promised further increases over the next three years. The Federal Reserve moved even further along the path towards normalisation of central bank policy, increasing the base rate for the US dollar in three increments to a range of 1.25% to 1.5% and hence further widening the interest differential between the US dollar and the Eurozone.

Sluggish progress in negotiations between the European Union and the United Kingdom as a consequence of the British people’s vote in favour of Brexit led to protracted uncertainty. In the period under review this was especially evident in the decline of the British pound against the euro and US dollar, although it was also reflected in the comparatively muted performance of UK stock markets. Yet the uncertainty surrounding the structuring of future economic and trade relations between the EU and UK as well as the free movement of workers is also generally unfavourable for the national economies of the remaining EU Member States, since it detrimentally affects the planning security and investment readiness of the business community.

Yields on German government bonds remained on a very low level in the year under review. The increases seen as the year progressed were merely modest across all maturities, with negative returns persisting well into the medium maturity segment. UK government bonds similarly saw fairly minimal increases, especially as these were limited primarily to the short and medium maturities. In the case of US Treasury bonds, on the other hand, a rotation of the yield curve could be observed in which rather significant interest rate increases were evident for short maturities. Longer maturities, on the other hand, saw declines.

The uncertainty of the previous year that had prevailed in the valuation of markets for corporate bonds subsided in the period under review. The emerging markets sector, in particular, benefited from more stable commodity prices and attractive exchange rates. This was increasingly reflected across all rating classes in a steady fall in risk premiums on corporate bonds.

Equity markets once again soared to new – in some cases historic – highs in the course of the year. Emerging economies and the US market, above all, booked significant price gains over the year as a whole. Most European indices also ended the year higher – in some instances substantially so – than the previous year, although the gains posted by the UK stock market were rather muted. European equity markets were driven principally by the continued expansionary monetary policy of the ECB and the search by investors for high-return assets. With this in mind, the high price levels can ultimately be explained only partially by fundamentals. Overall, stock markets once again proved to be broadly robust despite all the talk of crisis. While this is gratifying, there is an associated risk that bubbles may form.

The development of the world economy remains subject to various uncertainties and risks, first and foremost of a geopolitical nature. Global heterogeneity associated with varying economic trends and local flashpoints may be mentioned here as a particularly significant consideration. The ongoing risk of terrorism is another factor that needs to be monitored, even though capital markets have hitherto responded to this in rather robust fashion.

The euro more than made up for its losses of the previous year against the US dollar and climbed sharply from USD 1.05 to USD 1.20. The pound sterling also lost ground against the euro after the already heavy losses seen in 2016 following the Brexit referendum, sliding from GBP 0.86 to GBP 0.89. The Australian dollar similarly softened against the euro, retreating from AUD 1.46 to AUD 1.53.