The outlook for the global economy is clearly optimistic. Forecasts anticipate that the broad-based upswing will continue with the IMF expecting global GDP to grow by 3.9 percent per year in 2018 and in 2019.
The upswing is mainly driven by strong growth in advanced economies where production is predicted to grow further. The ECB foresees the euro area growing by 2.3 percent as it did in the year under review. Growth is only anticipated to slow slightly to 2.0 percent in 2019 against a background of a possible diminishing monetary support.
The strong and wide growth of the German economy will continue in 2018. In line with this outlook the German Federal Government’s latest Annual Economic Report predicts that the country’s gross domestic product will expand by 2.4 percent. This growth is still supported by the domestic economy, especially by private consumer spending. A notable increase is also foreseen for investments in construction due primarily to unwavering attractive financing conditions. However, the construction industry is already operating at the upper limits of its capacities. This is increasingly leading to bottlenecks and higher prices. The good global economy is also benefiting the export sector, which will also contribute to the growing economy. It is estimated that the rate of inflation will remain at the level recorded in 2017 and therefore still to be moderate. The labour market will continue to develop favourably in light of the good economy as employment figures continue to increase and jobless numbers decrease. The Kiel Institute for the World Economy (IfW) estimates that the average unemployment figure for the year will be 5.4 percent.
In the interim, the normalisation of monetary policies is viewed as the primary risk facing the German and the global economy, and could lead to uncertainty in the capital markets. At the beginning of 2018 economic experts also mentioned political risks, such as the outcome of the Brexit negotiations, or protectionist tendencies, especially in the USA, as possible factors that could burden the global economy, although they were not as strongly weighted as they were in the previous year.
The central banks’ monetary policies will still vary in 2018 as, at least, two interest rate hikes are expected in the USA where the Fed is likely to continue shrinking its balance sheet. In contrast, the ECB and the Bank of Japan are expected to leave their key interest rates at their respective low levels and continue buying bonds on the market. At the beginning of 2018 the ECB already announced that it was reducing its monthly volume of purchases from € 60 billion to € 30 billion. This is interpreted to mean that the ECB could raise interest rates for the first time in 2019 – if the rate of inflation moves toward 2 percent. In this environment we anticipate slightly rising interest rates. Yields on 10-year bunds could rise from the 0.43 percent noted at the start of 2018 to a level around 1.0 percent within the remainder of the year.
The euro strengthened in the currency markets in past months. In the interim the euro has largely achieved its purchasing power parity level of USD 1.25 to the US dollar and to a great extent has ended its prevailing under-valuation. We do not expect to see a further rise in the near future. The value of the euro also gained vis-à-vis the Swiss franc and in the interim almost reached CHF 1.20, a level that the Swiss National Bank previously defined as its minimum exchange rate.
The ECB’s continuing purchases of bonds within the framework of CBPP 3 should also result in favourable financing conditions for Pfandbrief issuers in 2018. Experts expect that issuing activities will be concentrated in the first months of 2018 as spreads could widen again as the ECB reduces its volume of newly purchased bonds. The total volume of new benchmark covered bond issues is expected to decline further to about € 100 billion. This decrease is mainly due to issuers’ notably lower refinancing requirements compared to 2017. All in all, Pfandbriefe and other covered bonds will, however, remain important refinancing instruments. This especially applies to special institutions like MünchenerHyp.