Economic researchers anticipate that the global economy will grow slightly in 2017. The IWF is forecasting that the global gross domestic product will rise to 3.4 percent in the current year and to 3.6 percent in 2018. This increase is based on the assumption that economic development will pick up, especially in the USA and the emerging markets. The economic forecasts are, however, accompanied by great uncertainty. This applies in particular to the direction of the new American president’s economic policies, which still remains unclear. His statements to date point towards a protectionist policy, which can have a negative effect on the American economy over the mid-term. Furthermore, the announcement that the British Prime Minister, Theresa May, will pursue a “hard Brexit” to take the UK out of the EU generated uncertainties concerning future economic developments in the EU and Great Britain.

Despite these uncertainties, economic experts still expect that growth in the euro area will not weaken substantially. The EU Commission predicts a 1.6 percent rise in the EU’s GDP in 2017 and 1.8 percent in 2018 with a dampening effect expected, in particular, from high levels of debt in parts of the euro area. Moreover, inflation is expected to rise slightly as oil prices have rebounded in the interim period.

The German economy continues to benefit from strong domestic growth that is expected to carry the upswing into 2017. The German Federal Government’s Annual Economic Report, however, anticipates that GDP will grow by a lower 1.4 percent. The report views the lower number of working days as the reason behind the decline and not a weaker economy. According to the report, both consumer spending and capital investments will act as primary growth generators with investments in residential housing construction, in particular, expected to expand. The labour market remains stable with the number of employed persons likely continuing to rise slightly while the unemployment rate could fall to below 6 percent. In addition, inflation is expected to rise to 1.4 percent due to higher prices for energy and food.

Central banks in the advanced economies will also act differently in 2017 as their monetary policies continue to drift further apart. While the Fed is expected to further raise its key interest rate, other central banks, and in particular the ECB, the Bank of England and the Bank of Japan, are expected to continue their expansive monetary policies in view of dampened economic prospects. If the rate of inflation in the euro area stays at the current higher level, it might generate discussions thereby increasing pressure on the ECB to alter its monetary policy regarding interest rates and taper its volume of bond purchases.

The improved outlook for the global economy, tapering discussions in Europe and the expected increase in interest rates in the USA could lead to a slight rise in the level of interest rates around the world and in turn also affect other asset classes. The foreign exchange markets are likely to see the gap between euro and dollar-based interest rates widen even further. However, during the second half of the year a countermovement could be seen if the ECB begins to retreat from its expansive monetary policy. It is anticipated that the British pound could again come under pressure at the start of Brexit negotiations and if the UK economy weakens as forecast. Development of the Swiss franc is expected to be stable to friendly and could benefit from possible political changes in Europe.

The first half of the year is likely to be quite lively for the covered bond and Pfandbrief markets as about three-quarters of the issues maturing in 2017 will come due in this period. Predictions call for a volume of about € 120 billion in benchmark covered bonds to be issued, a figure that is just below the level seen in 2016. The ECB’s TLTRO-II Programme is one reason for this as it gives banks access to liquidity at comparatively favourable conditions. Demand for covered bonds will, however, continue to be supported by the ECB’s purchase programme (CBPP 3). At a minimum, the ECB plans to pursue this programme until December 2017. This in turn will enable issuers to continue benefitting from favourable funding levels. Experts estimate that German Pfandbriefe will represent the biggest share of new issues followed by French, Spanish and Canadian covered bonds.