12 June 2017
Global Economic Perspectives
Global
North America
Economics
Global Economic
Perspectives
Date
12 June 2017
Deutsche Bank
Research
The Next US Recession
■ Long-term yields in the US have fallen substantially more than short-term
yields in recent months, causing several measures of the yield curve slope
to approach the flattest levels since the crisis. This market reaction follows
a string of disappointing data in the US, as well as news emanating from
Washington that has lowered the odds of meaningful fiscal stimulus.
Given the yield curve's ability to predict historical downturns, the recent
flattening could raise concerns that the next US recession is just around
the corner.
■ Despite this development, we do not see US recession risk as particularly
elevated; indeed, we think it is quite low for the next year. While recession
probability models based only on the yield curve slope point to higher
recession risk, our preferred recession probability model, which also
includes the Fed's policy stance and a measure of the corporate bond risk
premium, currently suggests that the odds of a recession over the next
12 months are less than 10%. This compares favorably to the 14% of time
the US has been in a recession since 1970.
■ More fundamentally, we do not see economic conditions in place that
would trigger a recession in the US for at least the next year. While there
is some evidence of excess in particular sectors – autos comes to mind –
these are not significant risks from a macro perspective. Moreover, there
is little or no evidence that traditional cyclical sectors – namely housing,
capex, and consumer durables more broadly – are overextended, and
sectoral balance sheets are reasonably solid.
■ Indeed, for the year ahead, the risk of an economy that begins to move
towards overheating seems noticeably greater than that of an economic
downturn. This means that recession risks could very well rise beyond
2018, especially if the Fed is forced to move more aggressively as the labor
market tightens further and inflation shows prospects of overshooting
significantly.
■ Our baseline outlook sees the unemployment rate moving down well
into the 3% range over the next 18 months, with inflation rising above
desired levels by early 2019, but no recession through 2019. We present
an alternative plausible scenario in which the unemployment rate falls
more rapidly as productivity fails to rebound sharply, leading to a larger
inflation overshoot. Finding itself meaningfully behind the curve in this
scenario, the Fed would have to tighten aggressively to catch up, leading
to the recession of late 2019 or 2020.
Peter Hooper, PhD
Chief Economist
+1-212-250-7352
Michael Spencer, PhD
Chief Economist
+852-2203 8303
Torsten Slok, PhD
Chief Economist
+1-212-250-2155
Matthew Luzzetti, PhD
Senior Economist
+1-212-250-6161
Deutsche Bank Securities Inc.
DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 083/04/2017.
Distributed on: 12/06/2017 13:54:07 GMT
0bed7b6cf11c
12 June 2017
Global Economic Perspectives
Introduction
Long-term yields in the US have fallen substantially more than short-term yields
in recent months, causing several measures of the yield curve slope to approach
the flattest levels since the crisis. This market reaction follows a string of
disappointing data in the US, including another weak Q1 GDP report and several
downside misses on recent inflation prints, as well as news emanating from
Washington that has lowered the odds of meaningful fiscal stimulus. The slope
of the yield curve has often been used as one measure to anticipate shifts in
economic growth momentum, with a significant flattening of the curve, typically
to inverted levels, occurring ahead of historical US recessions. In this context, the
recent flattening could raise concerns that a significant slowdown in US growth,
perhaps even a recession, is in the offing.
Despite these developments, we do not believe US recession risk over the next
year is particularly elevated. Indeed, we think it is quite low. To make this case
empirically, we construct a simple but accurate model of recession probabilities.
The model factors in the stance of monetary policy as measured by the real fed
funds rate minus the real neutral rate and a Fed measure of the excess bond risk
premium, as well as the traditional yield curve slope. It puts the odds of a US
recession in the next twelve months below 10%. This compares favorably to the
14% of time that the US economy has been in a recession since 1970.
More fundamentally, we do not see the economic conditions in place that would
suggest recession risks are elevated in the US, for at least the next year. While
there is some potential evidence of excess in particular sectors – autos comes
to mind – these are not significant risks from a macro perspective. Moreover,
there is little or no evidence that traditional cyclical sectors – namely housing,
capex, and consumer durables more broadly – are overextended, and sectoral
balance sheets are in reasonably solid shape. That said, recession risks could very
well rise beyond 2018, especially if the Fed is forced to move more aggressively
as the unemployment rate falls significantly below NAIRU and risks of inflation
overshooting begin to build.
The yield curve and recession risks
There is an extensive literature documenting the ability of the yield curve's slope
to predict future changes in economic activity, namely that significant curve
flattening precedes This empirical regularity is intuitive and works
through several channels: First, expectations of an impending recession should
lead the market to price future rate cuts by the Fed. Second, slower and potentially
negative growth will tend to depress expectations for future inflation, leading to a
compression in the term premium. Third, there is a tendency for a reallocation of
funds toward bonds if US growth is expected to slow or a recession is anticipated,
again causing the term premium to compress. These forces tend to reduce long-
term yields relative to short-term yields, leading to a flatter yield curve ahead of
economic downturns (Figure 1). Symmetrically, expectations of stronger growth
should tend to steepen the yield curve.
1 The NY Fed maintains a website that regularly updates recession probability predictions from the yield
curve and also contains an extensive list of references for studies on the relationship between the yield
curve and economic activity. See:
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12 June 2017
Global Economic Perspectives
Figure 1: US yield curve slope flattens prior to recessions
-4
-2
0
2
4
6
54 57 60 63 66 69 72 75 78 81 84 87 90 93 96 99 02 05 08 11 14 17
% Treasury yields: 10y - 3m
Source: FRB, Haver Analytics, Deutsche Bank
Figure 2: Yield curve slope has
approached post-crisis lows
-1
0
1
2
3
4
07 08 09 10 11 12 13 14 15 16 17
% Treasury yields: 10y-2y Treasury yields: 10y-3m
Source: FRB, Haver Analytics, Deutsche Bank
In this context, the significant flattening of the yield curve since late 2016 could
be troubling. Since their post-election peaks in December 2016, the difference
between the 10-year and 2-year Treasury yields has narrowed by about 50bp,
while the difference between the 10-year and 3-month yields has narrowed by
about 90bp (Figure 2). Both of these slopes have approached their post-crisis low
levels that occurred in July 2016 in the wake of the surprise Brexit vote.
Following a standard approach, we use a probit model to translate the movements
in this slope variable into an implied probability that a recession will occur at some
point over the next twelve months. According to this methodology, recession odds
are currently elevated, as would be expected given the recent flattening of the
curve. Specifically, the model suggests that there is about one-third odds of a
recession in the next twelve months (Figure 3). For comparison, the US economy
has been in a recession 19% of the time since 1920 and 14% since
Figure 3: Based only on yield curve, recession odds elevated in next 12 months
0
20
40
60
80
100
0
20
40
60
80
100
73 78 83 88 93 98 03 08 13 18
% % Recession probability over next 12 months: yield curve slope
33%
Source: FRB, Haver Analytics, Deutsche Bank
2 Following the insights from our colleague Steven Zeng, we also considered adjusting the yield curve slope
for the level of short rates. This model shows a higher probability of a recession, slightly above 40%. See
Zeng, Steven (26 January 2016), "Augmenting the Fed's recession probability model." DB Research Special
Report.
Deutsche Bank Securities Inc. Page 3
12 June 2017
Global Economic Perspectives
These results differ somewhat from those published by the NY Fed staff. The
primary difference is the definition of the recession indicator used on the left-hand
side in the model: the NY Fed staff model sets the recession indicator equal to one
if there is a recession twelve months ahead, while we set the recession indicator
equal to one if there is a recession at any point over the next twelve months.
DB model suggests near-term recession risks are low
While the slope of the yield curve has provided a simple and reliable measure of
recession risk in the past, our goal is to construct a model that is both simple in
terms of its inputs and more accurate than models that rely solely on the yield
curve slope.
One obvious way to enhance the simple yield curve-based recession probability
model is to include a measure of the stance of monetary policy. Historically, US
recessions have frequently been caused by Fed policy tightening in response
to potential overheating of the economy. To account for this dynamic more
consistently and completely than it is captured in the slope of the yield curve, we
include the difference between the real fed funds rate and the real neutral fed
funds rate. Policy is gauged to be tighter the more the real rate rises above the real
neutral rate. The former variable is measured as the nominal fed funds rate minus
year-over-year core PCE inflation; for the latter we use estimates from Laubach-
Williams (2001). As expected, the gap between these two rates tends to rise and
turn positive ahead of recessions, with the economy slowing in response to the
policy tightening (Figure 4). Historically, when the real fed funds rate has risen to
levels at least one percentage point above the neutral fed funds rate a significant
slowdown or recession has typically ensued.
Figure 4: Fed tightening key leading indicator of recessions historically
70 75 80 85 90 95 00 05 10 15
% % Fed policy stance* Treasury yields: 10y-3m
* Policy stance has been measured as real fed rate minus real neutral rate
Source: FRB, BEA, Haver Analytics, Deutsche Bank
A second variable we have added to enhance the simple model is a measure
of the excess bond premium calculated by the Fed Board's staff.3 The excess
bond premium is a measure of the portion of corporate bond spreads that reflects
3 See Favara, Giovanni, Simon Gilchrist, Kurt F. Lewis, and Egon Zakrajsek (8 April 2016), "Recession risk and
the excess bond premium." FEDS Notes.
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12 June 2017
Global Economic Perspectives
changes in risk premia rather than default risk expectations. The Fed staff's work
finds that this measure has provided an important leading signal about impending
recessions in the past (Figure 5). They argue that the excess bond premium
possesses these leading capabilities because it captures shifts in investor risk
sentiment that subsequently translate into tighter lending and financial conditions
that slow growth. Movements in the excess bond risk premium tend to be more
abrupt than the more gradual shifts in the yield curve slope and Fed policy stance,
suggesting that the excess bond risk premium captures an important dynamic
that is separate from the other two variables.
Figure 5: Excess bond risk premium has risen ahead of recessions but is
currently low
73 78 83 88 93 98 03 08 13
% % Excess bond risk premium
Source: FRB, Deutsche Bank
We construct our augmented recession probability model using these three
variables – the 10-year minus 3-month Treasury curve slope, the Fed's policy
stance, and the excess bond This alternative construct yields a clear
improvement over the simple Treasury yield curve model: it assigns near 100%
probability of a recession around historical recessions and typically very low
recession odds during non-recession periods (Figure 6). There are, however, a
few instances when the model has yielded mild false positives – ., assigned
recession odds of 60% or more when a recession did not occur. Most recently,
in early 2016, the model briefly assigned nearly 75% odds of a recession over
the next twelve months when markets plunged and credit spreads widened
substantially leading to a sharp tightening in financial conditions. The spike in
recession odds was short-lived: within a few months recession odds had fallen
back close to zero.
4 We have also considered more complicated alternative models that include variables such as broader
financial conditions indexes and corporate profit growth. While these variables tend to improve model
performance at the margin, we prefer the simpler models based only on higher-frequency / more timely
data.
Deutsche Bank Securities Inc. Page 5
12 June 2017
Global Economic Perspectives
Figure 6: Recession odds low over next 12 months according to DB model
0
20
40
60
80
100
0
20
40
60
80
100
73 78 83 88 93 98 03 08 13
% % Recession probability over next 12 months: DB model
9%
Source: FRB, Haver Analytics, Deutsche Bank
Fundamentals not consistent with elevated recession risks
Having concluded that the probability of recession in the next 12 months looks
low based on our preferred probability model, how soon could a recession occur
and what might cause it?
The current economic expansion is growing old by historical standards. At 32
quarters, it now ranks as the third longest expansion on record over the history
of US modern national income accounts (Figure 7). By early next year it will be
number two, and by mid-2019 number one. We think the expansion does have a
reasonable chance to set a new record, but it could end not long after it does so.
Figure 7: Current expansion approaching historical record
Trough Peak Duration (qtrs)
Average growth rate
(%AR)
Q4-1949 Q2-1953 15
Q2-1958 Q2-1960 8
Q4-1970 Q4-1973 12
Q1-1961 Q4-1969 35
Q1-1975 Q1-1980 19
Q3-1980 Q3-1981 4
Q4-1982 Q3-1990 31
Q2-1954 Q3-1957 13
Q1-1991 Q1-2001 40
Q4-2001 Q4-2007 24
Q2-2009 to date 32
Average 21
Source: BEA, Haver Analytics, Deutsche Bank
US economic expansions do not die of old age, rather they are brought to an
end by one of three types of developments (sometimes more than one of these
simultaneously):
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Global Economic Perspectives
Domestic economic imbalances
Sometimes recessions result from overinvestment. The housing bubble and
severe overinvestment in residential structures in the mid-2000s was at the heart
of the collapse into the great recession and financial crisis of 2007-09. Previously,
the decade-long expansion of and overinvestment in business capital during the
1990s, which culminated in the dot-com tech bubble, was the primary cause of
the business-spending-led recession of 2001. During both these episodes, private
investment as a share of GDP had risen to nearly 20% (Figure 8). It had risen to
similar heights ahead of the recession of 1980 as well. The current expansion is
still “young” in terms of real investment spending. US households and firms are
underinvesting in both homes and business capital, as the housing vacancy rates
continue to test new lows and as the growth of business capital services remains
mired at near historic lows, helping to hold down labor productivity growth. While
there may be some stress in commercial real estate and autos, these sectors
are not large enough to touch off a more generalized downturn in investment
spending from relatively modest levels to begin with.
Figure 8: Private fixed investment not currently elevated
12
14
16
18
20
12
14
16
18
20
75 80 85 90 95 00 05 10 15
% % Private fixed investments as percentage of GDP
Source: BEA, Haver Analytics, Deutsche Bank
International shocks
Global developments have contributed to downturns in the US in the past, though
typically in concert with domestic imbalances or overheating. Oil shocks caused
by wars in the Middle East factored importantly into US recessions during the
1980s and early 90s. These events generally exacerbated inflation pressures that
led to significant monetary tightening. The development of the tight oil market in
the US has reduced the likely severity of such an event in the future. At the same
time, as emerging market economies, especially China, have grown in importance
in the global economy, the sensitivity of the US economy to events abroad may
have increased. However, a sudden collapse of activity in China or elsewhere on
a substantial scale would seem to be a relatively low probability event for the
foreseeable future.
Fed tightening
The third and most frequent (historically) cause of recessions in the US is
monetary tightening by the Fed in response to an economy that is overheating
with inflation beginning to run out of control. As discussed earlier, significant
Fed tightening, with the real fed funds rate rising more than one percentage
Deutsche Bank Securities Inc. Page 7
12 June 2017
Global Economic Perspectives
point above its neutral rate, has been at play ahead of almost all of the previous
downturns.
When will the Fed tighten enough to cause the next
recession?
If current market expectations about inflation are realized, the next recession (or at
least the next Fed tightening that would be forceful enough to cause a recession)
could still be many years away. We think this is too optimistic.
As we have written recently, the US labor market is on an impressive improving
trend with momentum behind It is now at full employment and on the
verge of moving well beyond full employment. Simple arithmetic says that the
unemployment rate could continue to fall into the mid to low 3s or even lower
over the next couple years. This would happen if real GDP growth continues at
its moderate 2% pace of recent years and the labor force participation rate levels
out this year and resumes its secular downtrend next year thanks to the ongoing
retirement of the baby boom generation. How far and how fast the unemployment
rate moves in that direction would depend on how rapidly labor productivity
growth came off the floor it has been on for the past six years. Figure 9 shows
a couple scenarios. One has productivity growth recovering a full percentage
point from its recent 6-year average, which is roughly consistent with our baseline
House forecast, and the second has it recovering only 1/2 of a percentage point.
To get a sustained full percentage point recovery in productivity growth may well
require a good deal more private capex or supportive government policy than is
currently envisioned.
Figure 9: Risk that unemployment rate falls rapidly
1
2
3
4
5
6
7
8
9
10
11
1
2
3
4
5
6
7
8
9
10
11
60 65 70 75 80 85 90 95 00 05 10 15 20
% % Unemployment rate
Forecast with flat productivity growth Baseline forecast
Forecast
Source: BLS, Haver Analytics, Deutsche Bank
The last time the unemployment rate fell into the mid-3s – in the 1960s – inflation
took off. It is worth taking a closer look at this episode. GDP grew at above
potential rates through the first half of the 1960s, and unemployment fell fairly
steadily from around 7% to below 4%. As it moved down through the 4s, core
CPI inflation, which had been very low for the previous seven years, remained
below 2% and even declined some in the neighborhood of %. Once the
5 See "US Outlook: Above consensus growth and inflation risks rising." (10 May 2017), DB Research Special
Report.
Page 8 Deutsche Bank Securities Inc.
12 June 2017
Global Economic Perspectives
unemployment rate fell below 4%, however, inflation began to rise, rapidly. It
jumped by 2 percentage points over the next year and another two percentage
points to a level of 6% in ensuing years as the unemployment rate remained below
4%. Only after the Fed tightened and unemployment jumped in the recession of
1970 did inflation ease again.
Figure 10: Core inflation rose once unemployment fell below 4% in 1960s
0
2
4
6
8
0
2
4
6
8
60 61 62 63 64 65 66 67 68 69 70 71
% % Core CPI (%y/y) Unemployment rate
Source: BLS, Haver Analytics, Deutsche Bank
There are of course limits to such historical comparisons. Inflation expectations
may now be anchored more firmly by well understood central bank inflation
objectives, and technological advances like global sourcing and the dissemination
of pricing information via the internet may help to quell inflationary pressures. But
we expect that the laws of supply and demand have not been rescinded totally
in the labor market, and as the supply of available workers continues to shrink
relative to demand with the declining unemployment rate, we would still expect
to see at some point a substantial increase in wage and price pressures.
With this thought in mind, a quite plausible scenario is that as the unemployment
rate moves down well into the 3s, over the next 18 months, inflation could very
well begin to rise significantly at some point by early 2019. Finding itself behind
the curve, the Fed would tighten aggressively to catch up. This tightening would
lead to the recession of late 2019 or 2020.
How does this scenario translate into the real fed funds rate gap measure of Fed
policy stance that we outlined earlier? Our current baseline forecast has the Fed
raising rates four times in 2018 and then three more times in 2019 as the real
neutral fed funds rate rises to about % by end-2019. We also expect the Fed's
balance sheet to unwind over time, adding to the monetary restraint. Based on
Fed Board staff estimates, the 10-year Treasury term premium could rise by about
15bp per year in 2018 and 2019 as the Fed unwinds its balance Using
simulations from the Fed's model of the US economy, this rise in long-term yields
is consistent with about two rates hikes per year given historical
We consider an alternative scenario where a significant overshoot of core inflation
6 See Bonis, Brian, Jane Ihrig, and Min Wei (20 April 2017), "The effect of the Federal Reserve's securities
holdings on longer-term interest rates." FEDS Notes.
7 This finding is consistent with a footnote in a speech by Fed Chair Yellen in January 2017. See: Yellen, Janet
L. (19 January 2017), "The economic outlook and the conduct of monetary policy." Speech at the Stanford
Institute for Economic Policy Research.
Deutsche Bank Securities Inc. Page 9
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Global Economic Perspectives
causes the Fed to tighten more aggressively in 2019, raising rates eight times for
a total of 200 bps, in line with the "measured pace" episode of the mid-2000s.
Under our baseline scenario, the Fed's policy stance, accounting for a rundown
in the balance sheet, approaches levels of restrictiveness that have historically
signaled a recession – our measure of the Fed's policy stance is around %
around end-2019, while historical recessions were typically preceded by an
increase to 1% or above. The more hawkish scenario would clearly move the Fed's
policy stance to a level that would make a recession likely by late-2019 or 2020.
Figure 11: Fed policy could tighten enough in 2019 to induce a recession
-4
-3
-2
-1
0
1
2
3
4
85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 15 17 19
% Fed's policy stance*
*Real fed funds rate minus real neutral fed rate
Baseline scenario for end 2017,
end 2018 and end 2019
Hawkish scenario
for end 2017, end 2018
and end 2019
Note: We account for the Fed's balance sheet in our measure of the Fed's policy stance. Source: FRB, BEA, Haver Analytics, Deutsche Bank
Peter Hooper, (1) 212 250 7352
Matthew Luzzetti, (1) 212 250 6161
Torsten Slok, (1) 212 250 2155
Page 10 Deutsche Bank Securities Inc.
12 June 2017
Global Economic Perspectives
Central Bank Watch
G3
US
Figure 12: G3 policy rates
-2
0
2
4
6
8
2001 2004 2007 2010 2013 2016
%
Fed BoJ ECB
Source: Deutsche Bank
% Current Jun-17 Sep-17 Dec-17 Mar-18
Fed
BoJ
ECB
Source: Deutsche Bank
After raising rates at its March meeting, we expect the Fed to undertake two more
rate hikes in 2017. The next rate increase is expected at the June FOMC meeting.
We now expect the Fed to pause in September as it announces a policy to begin
in October a gradual tapering of its balance sheet reinvestment purchases. Our
best guess is that the tapering of reinvestment purchases will be completed by
the end of 2018. We see another rate hike coming in December, with four more
to follow next year.
Japan
The BoJ's Yield Curve Control implies, for now, a commitment to keeping the 10yr
JGB yield around zero. But the target rate can change depending on particular
on developments in inflation expectations. That is, it should be thought of as
embodying a real interest rate target. Rising US bond yields and therefore a
weaker yen could allow, with a lag, a rise in the JGB yield target. The overnight
rate of % is unlikely to rise unless inflation rises much more than we expect.
Euroland
The ECB is writing the script for a slow, dovish exit. Twice in the last six months the
ECB has taken a tentative exit step, yet both times the dovish message dominated.
The next move is unlikely to come as soon as September. We expect a six-month
QE extension to be announced in December at a slower pace of EUR 40bn.
Other European countries
UK
Figure 13: Key European policy rates
-2
0
2
4
6
8
2001 2004 2007 2010 2013 2016
UK Sweden Switzerland
%
Source: Deutsche Bank
% Current Jun-17 Sep-17 Dec-17 Mar-18
BoE
SRB NA
SNB NA
Source: Deutsche Bank
The Brexit growth shock is “balanced” against the sterling inflation impact. We
expect the BOE to maintain its neutral stance. Rising inflation skews risks towards
a tightening bias but this should return to neutral as growth slows.
Sweden
The Riksbank last cut rates 15bp to % in Feb-16. Its profile suggests rates
will remain at current levels with a hike in 2017 unlikely. A quick appreciation of
the Krona weighing on inflation could keep QE discussions alive, however.
Switzerland
The pressure on the SNB will remain given Switzerland’s comparative safe haven
status, the ECB’s slow taper and the euro area’s structural problems. Thus, we
expect the SNB not to change its exceptionally loose stance before H2 2018.
Deutsche Bank Securities Inc. Page 11
12 June 2017
Global Economic Perspectives
Dollar bloc
Canada
Figure 14: Dollar Bloc policy rates
0
2
4
6
8
10
2001 2004 2007 2010 2013 2016
Canada Australia NZ
%
Source: Deutsche Bank
% Current Jun-17 Sep-17 Dec-17 Mar-18
BoC
RBA
RBNZ
Source: Deutsche Bank
We continue to expect the BoC to hike just once this year, most likely in Q4. To
be sure, much will depend on the trajectory of the US economy and fiscal policy.
In our view, the BoC will want to see at least another quarter of data, before
becoming substantively more positive on the outlook.
Australia
For the RBA, higher official interest rates are unlikely before mid 2019 in our
view. The indebtedness of the household sector and hence the potency of interest
rate increases (given the vast bulk of housing debt is of a variable rate nature)
also suggests that any future increases in official interest rates will be slow, and
cautious.
New Zealand
We expect the RBNZ to leave the cash rate unchanged for the remainder of 2017,
and that the current easing phase has now likely come to an end. Inflation was
a little stronger than the RBNZ expected in Q1-17, and with ongoing strength
in domestic demand, little signs of material slowing in house price growth and
emerging signs of strengthening retail price pressures, we suspect the Bank’s
next move will be a hike. We expect the first hike in Q1-2018.
BRICs
China
Figure 15: BRIC policy rates
0
10
20
30
2001 2004 2007 2010 2013 2016
China India Brazil Russia
%
Source: Deutsche Bank
% Current Jun-17 Sep-17 Dec-17 Mar-18
PBoC
RBI
BCB
CBRF
Source: Deutsche Bank
Growth likely peaked at % in Q1. The property bubble is getting larger and
impose upside risks to growth in 2017 and downside risks beyond. Credit supply
will likely tighten in the next few quarters and drive growth to % by Q4.
India
RBI kept the policy rate unchanged in June but turned less hawkish as expected.
The sharp downward revision to inflation forecasts, particularly for the 1H of FY18
has raised expectations of a possible rate cut in the period ahead, contingent on
incoming inflation data. While we do not rule out the possibility of a 25bps rate
cut in the August or October policy meeting (we think there is a 50% chance),
we are, however, not changing our rate call (no further rate cuts in this cycle) at
this juncture.
Brazil
The central bank cut the SELIC overnight rate by 100bps again in May and
signaled a slower pace of monetary easing ahead. While the political turmoil
has forced the BCB to be more cautions, low inflation and the economy’s slow
recovery justify further rate cuts. We expect the BCB to cut the SELIC rate to %
this year.
Russia
We believe there is room for the CBR to deliver 200bps in cumulative cuts in
2017 to 8% by end-2017 (% now). However, the path is less certain. We are
currently forecasting 5X25bps cuts in the remaining meetings, but could see the
CBR getting cuts out of the way sooner than we currently expect. The CBR will
also likely start discussing introduction of a band around the 4% target, as inflation
undershoots its target in the coming months.
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D
eutsche Bank Securities Inc.
Page 13
Figure 16: Central Bank Policy Rate Monitor
Source: Deutsche Bank, Central Banks, Haver Analytics
12 June 2017
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lobal Econom
ic Perspectives
12 June 2017
Global Economic Perspectives
Figure 17: Key Economic Forecasts
Source: See below
Figure 18: Forecasts: G7 quarterly GDP growth
(a) Euro Area and the Big 4 forecasts are as of 12/05/2017. All smaller euro area country forecasts are as of 12/05/2017. Blue figures signal upward revisions. Blue, underlined figures signal downward revisions. (b) Annual
German GDP are not adjusted for working days). (c) HICP figures for euro-area countries/UK (d) Current account figures for euro area countries include intra regional transactions. (e) The regional aggregates have been
calculated based on the IMF weights released in October 2016. (f) Financial year forecast for fiscal balance. Source: Haver Analytics, National authorities, Deutsche Bank Research
The authors of the report wish to acknowledge the contribution made by Avik
Chattopadhyay in preparation of the report.
Page 14 Deutsche Bank Securities Inc.
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Global Economic Perspectives
Appendix 1
Important Disclosures
*Other information available upon request
*Prices are current as of the end of the previous trading session unless otherwise indicated and are sourced from
local exchanges via Reuters, Bloomberg, and other vendors. Other information is sourced from Deutsche Bank, subject
companies, and other sources. For disclosures pertaining to recommendations or estimates made on securities other than
the primary subject of this research, please see the most recently published company report or visit our global disclosure
look-up page on our website at Aside from within this report,
important conflict disclosures can also be found at https://gm/ under the "Disclosures Lookup" and "Legal"
tabs. Investors are strongly encouraged to review this information before investing.
Analyst Certification
The views expressed in this report accurately reflect the personal views of the undersigned lead analyst(s). In addition,
the undersigned lead analyst(s) has not and will not receive any compensation for providing a specific recommendation
or view in this report. Peter Hooper, Michael Spencer, Torsten Slok, Matthew Luzzetti
Deutsche Bank Securities Inc. Page 15
