EFTA01458965.pdf

8 December 2015 World Outlook 2016: Managing with less liquidity After remaining within a narrow band (0.Ipp) of zero for most of this year, inflation looks set to rise with base effects likely to add 0.6-0 7% by February. We expect CPI to average 1.1% in 2016 but it will probably still be shy of 1% at the time of the May inflation report. Evidence of rising inflation will be important to the BoE when it comes to deciding to tighten policy, as will improved prospects for wages and economic growth generally. Some on the Monetary Policy Committee would no doubt feel uncomfortable raising rates at the same time as having to explain the downside miss to its inflation target, but we do not expect this to stop the Bank from hiking. Should the Fed raise rates in December as we expect: then our call for the first BoE move in May looks reasonable based on past experience. The Bank is not governed by US policy — but there are numerous reasons we think the MPC will follow suit with a lag: i) globalisation has meant increased synchronisation, with both the BoE and Fed facing the same external conditions, ii) the UK is sandwiched between the tightening Fed and loosening ECB, iii) given the potential risks from a Fed move (particularly to EM), it seems reasonable for the BoE to wait given the UK's external sensitivity, and iv) in signaling the start of a hiking cycle a Fed tightening could push the dollar higher leaving the pound weaker (note our bearish sterling forecasts) — giving the BoE more room to cut. Figure 14: Macro-economic activity & inflation forecasts: UK Economic activity 2015 2016 2015E 201tif 20 ill. I% goy, scar) 01 02 al 04F 01F 02F ME (14F yov %New '!0., yoy GDP 1.6 2.6 1.9 2.6 2.6 2.6 2.6 2.6 2.4 2.6 2.3 Private consumption 3.1 3.7 3.0 2.4 2.4 2.4 2.4 2.4 3.0 2.6 2.4 Investment 6.3 4.2 6.4 4.1 4.9 6.7 6.7 6.7 3.9 6.1 6.0 Gov't consumption 4.4 1.6 6.3 0.0 0.0 0.0 0.0 0.0 2.4 0.8 0.0 Exports -4.7 7.8 3.6 2.4 2.4 2.0 2.0 2.0 3.6 2.7 1.8 Imports 2.6 -10.4 23.8 1.9 2.6 2.6 2.6 2.6 3.4 4.0 2.2 Domestic demand 4.1 -23 7.9 1.7 2.6 2.8 2.7 2.6 2.4 2.8 2.4 Contribution (pp): Stocks 0.1 -13 0.9 -0.1 0.1 0.1 0.0 0.0 -0.9 0.2 -0.2 Net trade -0.6 1.4 -1.6 0.0 0.0 -0.1 -0.1 -0.1 -0.1 -0.6 -0.2 Industrial production 1.6 2.4 0.8 0.8 0.8 0.8 0.8 0.8 1.2 0.9 0.8 Unemployment rate, % 6.6 6.6 6.3 6.3 6.2 6.1 6.1 6.0 6.4 6.1 4.9 Prices & wages I% yoy) CPI 0.1 0.0 0.0 0.1 0.7 1.0 1.1 1.6 0.0 1.1 1.9 Producer prices -1.8 -1.6 -1.8 -1.2 -0.1 0.1 1.0 1.6 -1.6 0.6 1.9 Compensation per empl. 2.3 2.6 3.0 1.9 2.4 2.3 2.6 3.0 2.4 2.6 3.4 Productivity 0.8 1.1 0.7 0.9 1.7 1.6 2.1 2.1 0.9 1.9 1.8 Sot.r. /6•00604•6600.3 00.001441043/0***re* The timing of UK rate rises could be impacted by the EU referendum. Figure 15: Other indicators & Currently the referendum bill is going through the upper house, where peers financial forecasts: UK have amended the legislation which — if retained — would allow 16/17-year- ens 2014f 2.117$ olds to vote. This is contentious, as younger voters are seen as more M4givalh.16 1.1 04 26 30 supportive of EU membership. Whether or not this amendment is upheld, RPM 00666406•006. FY 0044 Won 01P 60 40 4237 40 4260 40 4334 4.0 .1460 allovvreg 16/17-year-olds to vote could delay the previously expected timing of Toodelsobnc6.166/ OOP 43 41 es at the •,,ote - either because of the time it takes to register the additional voters Curnal 64044. 00 W .020 414 me 420 0.00•1 moot% of COP 41 43 41 30 or because the bill goes back and forth before the elected Commons finally FitlIFICOOIJaKKOL t-ow (44:46 .r4014 C44:16 gets its way to drop the amendment. A pre-summer vote thus looks difficult 0ffici•I 0I) 00) 0A IS IN MO OW 00. GM 1.12 (given the referendum cannot be held within four months of the bill being I004611 1.f0 1.46 2A0 2A0 um pe• OOP 1A2 19 Ii? passed), with autumn more likely - if not into 2017. The Conservative Party's 00/ 072 011 071 GT manifesto pledged a referendum before end 2017. Soma' Meant Ala SUM Bent alonseol; ASO' A delay raises the risk that inward investment is not merely deferred but DroorPor 07 diverted to other countries. This could be particularly disruptive to growth given that the UK has the largest stock of inward investment globally outside Page 28 Deutsche Dank AG/London CONFIDENTIAL - PURSUANT TO FED. R. CRIM. P. 6(e) DB-SDNY-0119135 CONFIDENTIAL SDNY_GM_00265319 EFTA01458965