- Eurogroup ends without an agreement – next meeting likely on Saturday
- Disagreement centres on pensions, VAT and corporate tax rate but can be bridged
- US consumer spending accelerates signalling economic growth rebound
Eurogroup again ends with no deal
In what is becoming a reoccurring story, Thursday’s Eurogroup came and went without much sign of agreement. The meetings in the morning between Greek Prime Minister Tsipras and the leaders of the institutions were already a sign of things to come. The objective of the morning meetings were for the two sides to agree on a document, which the Eurogroup could then discuss at the meeting in the afternoon. Instead, Greece and the institutions presented separate plans to the ministers of finance. The message following the Eurogroup meeting was that a deal was not yet in sight.
Pensions, VAT and corporate tax rate the sticking points
There appear to be three main areas where Greece and the institutions have differences. First of all pensions. The institutions want Greece to raise the retirement rate to 67 quicker than proposed by the Greek government. They also want the country to phase out a top-up payment for poorer pensioners more quickly. Second, the creditors want Greece to include many types of food (including processed foods and restaurants) at the highest VAT rate. Finally, the institutions would like to see a more modest corporate tax hike than proposed by the Greek government, as well as the scrapping of a special one-off tax on corporates with profits above 500K.
Differences have narrowed – next Eurogroup on Saturday
The gaps between the two sides have reportedly narrowed. On all the areas mentioned above, the differences were much bigger a few days ago and now actually look like they can be bridged. Indeed, we continue to think that a deal will be reached eventually. However, it may still come too late to make the IMF payment on time on Tuesday, given the need for Greece to pass measures through parliament. In addition, the German parliament would also need to approve the deal. It is unclear how the IMF would deal with late payment. Though it has taken a tough line in public, its rules allow some flexibility and in any case it would not be widely seen as a technical default. One bit of good news is that bank deposit flight seems to have stabilised over the last couple of days, though it is too early to know whether this will be sustained, especially if the stalemate continues.
US consumer spending rebounds in May
May’s report on personal income and spending suggests that the US economy is returning to robust rates of growth. Indeed, US consumer spending in May was the highest in six years, increasing 0.9% up from an upwardly revised 0.1% the previous month. Meanwhile, personal income also showed a solid performance, as a result of a stronger increase in wages and salaries. Personal income grew by 0.5% in May, unchanged from the previous month. Consumers, even reached into their savings, since the saving rate dropped in May to 5.1% from 5.4%, as they finally starting to spend the oil windfall.
These reports offer more evidence that the economy is recovering in the second quarter after it contracted by 0.2% in the first quarter. We think that consumption growth will remain strong on the back of a firm labour market and higher wages, as households continue to spend the windfall gains of lower oil prices. This data are likely to reassure the Fed as it moves closer to a rate hike, which we expect will likely be in September.