Global Daily – Another day, another Eurogroup

by: Nick Kounis , Aline Schuiling , Maritza Cabezas

  • Eurogroup meeting to resume Thursday amid differences between Greece and creditors
  • Germany’s Ifo business climate indicator declines, but economic prospects still good
  • US GDP growth contracted more modestly in Q1, while Q2 bounce is on the cards


 

Eurogroup to resume Thursday after overnight talks

Another day, another Eurogroup, but still no deal between Greece and its creditors. Wednesday evening’s Eurogroup ended with little progress made towards an agreement amid ongoing significant differences between Greece and the institutions. It was planned that meetings would continue into the night between Greece and its creditors. The ultimate aim would be to have the paperwork ready by tomorrow morning to facilitate an agreement by the Eurogroup, which meets again tomorrow afternoon (13:00 CET). Earlier on Wednesday it already became clear that there remained a lot of work to do. Gaps remain on a number of issues, but the IMF is particularly concerned that not enough is being proposed to reform the pension system, while fiscal consolidation would rely too much on tax hikes (which it sees as bad for growth) and improved tax collection (too optimistic) rather than spending cuts. We expect a deal eventually, but time is running out. It will be a close shave as to whether there will be a deal in time to get Greece the funding to pay the IMF on 30 June.

Germany’s Ifo business climate declines

The Ifo business climate indicator declined to 107.4 in June, down from 108.5 in May. The expectations component fell to 102.0 from 103.0, while the current conditions component declined to 113.1 from 114.3. The fall in the Ifo is in conflict with the composite PMI in June, which increased to 54 from 52.6 in May. Historical patterns in the Ifo, the PMI and GDP growth show that the Ifo’s expectations component tends to have a slightly better relationship with GDP growth than the PMI, but that the relationship can be unstable occasionally. Indeed, recent data suggest that since the start of 2014 changes in the Ifo expectations are lagging behind changes in GDP growth. Therefore, it seems that the decline in the Ifo expectations during the April-June period reflects the slowdown in GDP growth in Q1 (to 0.3% qoq, down from 0.7% in 2014Q4). Consequently, we think we should not draw too strong conclusions from the decline in the Ifo, especially since the PMI is moving in the other direction. We still think that there is still good reason to expect a pick-up in GDP growth from the 0.3% recorded in Q1 on the back of the weak euro and low energy prices and interest rates.

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US GDP growth contracted less in Q1 in last estimate

The third estimate showed GDP declining by 0.2% in the first quarter, this is less than the previous estimate of -0.7%. The revision showed that consumer spending was stronger than previously estimated and that firms stocked up more inventories. Still this report highlights a historical pattern of a recurrent weakness in the first quarter GDP growth, followed by stronger growth thereafter.  Indeed, further revisions are possible when the Bureau of Economic Analysis issues its annual revisions in July.

US economic activity to strengthen going forward, boosted mainly by consumption

The underlying data that has been released so far for the second quarter, suggest that GDP growth will improve. Retail sales and the housing market are stronger, while business investment has been showing a modest pickup. We expect consumption growth, which represents more than two-thirds of the economy,  to continue improving  on the back of a firm labour market and higher wages. In addition, households have not yet spent all the windfall from lower oil prices. We expect GDP to grow by 2.7% in 2015.