EFTA01458963.pdf

8 December 2015 World Outlook 2016: Managing with less liquidity easing moves of the cycle. The outlook for economic recovery is not strong, but modestly above-trend economic growth means a gradual narrowing of the Figure 8: Balance of probabilities output gap and hence a gradual normalisation of core inflation. We expect that points to initial ECB tapering roughly a year from now the ECB will have to think about whether to extend discussion in late 2016 QE again or to taper in 2017. It may be slightly more marginal after what happened on 3 December, but the balance of probabilities suggests that a 22 3044 07.03 lc 39030 NN00W0, ro ..404. I ?I ..1/kniaar tapering discussion is likely to take place. 20 by n: x.ris I I Is On current expectations, core inflation will have risen to within a couple of tenths of Its historical average in H2 2016 and be on course for a further lxanraaw correction upwards in 2017 and 2018. The ECB has tended to announce new I6 unconventional policy measures when the two-year ahead consensus headline 1.2 Eat Curlew 34 Profte0200 Forecnton inflation forecast is 1.6% or lower and tighten policy when it is 1.9% or higher. Ivene•r 0400 costm44114401ne I 0 ...7.394 .... _...... ..... ... If our forecasts for cons and non-core inflation are correct in particular ow 2000 2002 NS 2003 2006 2010 2012 2014 2016 expectation for rise in oil prices in 2017 — headline inflation ought to satisfy San* 0701•00 &At 4n • 20111 the criterion for tightening policy. Mario Draghi is likely to be cautious. A sustainable correction in inflation is the objective - this means more than just reaching the inflation target for one year. Figure 9: Fiscal risk get more worse The ECB will be nervous of creating its own 'taper tantrum'. We expect the in 2016; it is political risk we need to ECB to taper its QE purchases, meaning that purchases will continue after the focus on current scheduled end date of March 2017 at a declining rate. A decision to Ea0/warning erdlcatce fiscal sub- em taper is the first step towards exit and that is likely to result in a euro fixed 4433 (047 "'"' -..Mc income market correction/normalisation later in 2016, tightening financial 10 Coma.< 09 conditions. We see the first ECB policy rate hike only at the end of 2018. OS • 07 • CEO • The risk is that oil prices continue to decline in the near term and weigh on 06 • as .3/4 • 04 • S headline inflation. If this weakens medium-term inflation expectations, the late- 03 2016 tapering risk will dissipate and the pressure for further ECB easing will 02 01 grow. 00 2006 2007 2000 2011 2013 2016 0.34400,w alM. cariecnoto 0474/ M. can Political risks to rise into 2017 ovstbad 044 r 0 inkinasal ea *boants• axis Mres.414 Sow. Df40.010.11*..~111. In Spain we think the tail risk of a radical party having a position of influence within the new government is low. Beyond that, however, the euro area is dotted with potential risks. Portugal's minority Socialist government looks unlikely to survive a major test, particularly if it requires more austerity and reform. The Catalan independence bid is a source of uncertainty. Ireland's outgoing coalition has a tailwind from strong GDP growth but is short of majority on current polls. Italy is the peripheral with the largest proportion of votes going to eurosceptic and populist parties. The risk is that the 2018 Italian election is brought forward one year. Opinion polls leave the UK referendum on EU membership — possibly in late 2016 — too close to call for now. The areatest political tests for Europe next year come from the refugee and Figure 10: Other indicators & terror crises. The conservative backlash in Germany against Merkel's initial welcoming is very gradually narrowing differences across countries on how financial forecasts: Euro area best to address the refugee wave. The new terror dimension to the iefugee 7074 23:4 334r 177,0 AS 32 crisis we believe will more likely than not lead Europe to a more unified stance. M30t.w.%pl 00 Pow 40044 We 0OP 17 -TO 47 'I. Germany may be more willing to compromise on otherwise more divisive OuOb. debt I40 OOP 94* 9411 940 020 Immo Yltt. 1401bn 34111 32110 200 a.3 issues like Greece debt and fiscal easing to secure a better deal for refugees, 0034 belenc41/0 CCP 2.4 12 20 23 for example, or more funds to deal with the crisis 'at source'. tutors /eta IUSI14 3.56 no AI 3 Cu0541160:000.1401004 24 30 27 23 ;th lz.t. ai However, we do not expect any real progress on euro area integration — 011441 001 000 000 091 YA at* .011 .0 13 .015 415 greater fiscal autonomy as a compromise for Catalonia would be the opposite yold OM 005 0/0 110 of what a stronger euro area requires — nor do we expect the unified stance U1000 SYR 100 IM OS/ 010 JW PerEUR 134 129 124 115 to last into 2017. The closer we get to the German, French and Dutch • mw FUR 072 577 071 071 elections in 2017. the more disharmonious Europe is likely to sound. Political Senor. Ataceel n COtexis tat Sweat% es of uncertainty will likely be another hurdle to growth in 2017 while elections Otanede 07 create reasons for further delays to structural reforms. Page 26 Deutsche Dank AG/London CONFIDENTIAL - PURSUANT TO FED. R. CRIM. P. 6(e) DB-SDNY-0119133 CONFIDENTIAL SDNY_GM_00265317 EFTA01458963