Greece: Disbursement of funds & debt relief approved
The first review of the bailout programme should now be completed as all parties reached agreement on Tuesday. Reforms are deemed sufficient to reach the primary surplus target of 3.5% of GDP by 2018. Their implementation will allow disbursement of the second tranche of EUR10.3bn, starting with a transfer in June of EUR7.5bn, which will contribute towards covering debt servicing needs and clearing some arrears. The remainder will be disbursed in the summer. Meanwhile, an agreement was reached on debt relief measures that could bring in the IMF by the end of 2016, subject to agreement by the Fund’s board. This will facilitate market access and encourage economic activity, although the economy will remain in recession in 2016 (EH forecasts -0.6%). In the short term, the repayment profile will be smoothed, with longer maturities and lower interest rates. However, the bulk of the measures will only be applied on completion of the programme (2018) and pending further assessment of debt sustainability. This is likely to include further interest rate reductions and extension of loan maturities.
Germany: Strong Q1 GDP growth, robust outlook
Q1 real GDP growth was confirmed at +0.7% q/q, a strong performance after +0.3% q/q in each of the two preceding quarters. Domestic demand was once again the key growth driver, particularly fixed investment, which increased by +1.8% q/q (+1.4% in Q4 2015), with both investment in equipment (+1.9% q/q) and construction (+2.3%) performing well, the latter as a result of continued mild weather in Q1. Private consumption expanded by +0.4% q/q and government consumption by +0.5% q/q. Export growth recovered to +1% q/q in Q1 (-0.6% in Q4 2015) while import growth also picked up, to +1.4% q/q (+0.5% in Q4). As a result, the negative contribution from net exports to q/q GDP growth moderated to -0.1pps in Q1 (from -0.5pps in Q4). Euler Hermes continues to forecast robust but unspectacular full-year growth of +1.7% in 2016 and +1.8% in 2017 (up from +1.4% in 2015). The outlook is supported by the Ifo Business Climate Index, which picked up to 107.7 points in May (106.7 in April) and the GfK Consumer Climate Indicator, which is up to 9.7 in May (from 9.4) and is forecast at 9.8 in June.
U.S.: Fed surprises with possibility of a June hike
Minutes from the Fed’s April meeting surprised analysts and financial markets by suggesting that an interest rate hike in June is now a distinct possibility. The minutes specifically referred to the June meeting five times, stating that if conditions continue to improve “it likely would be appropriate for the Committee to increase the target range for the federal funds rate in June”. Financial markets had put the probability of a June hike at less than 5% but now that probability is 38% and by July the probability of a hike is 60%. The Fed may be getting the inflation outlook it is looking for as oil prices were up 13% m/m in May and by 49% since February, while gasoline prices were up 6.5% m/m in May and 28% since February. We now expect two rate hikes this year. Housing data, although volatile, also suggest strength. New home sales increased by +16.6% m/m in April, with prices rising 9.7% y/y, while new home sales gained +1.7% m/m, with prices increasing by 6.3% y/y. However, manufacturing remains weak as the Philadelphia Fed survey indicated contraction for the second consecutive month.
Eurozone: Soft but resilient business confidence
The Composite PMI unexpectedly fell to 52.9 in May from 53.0 in April. This softness mainly reflected findings in the manufacturing sector, for which business confidence decreased to 51.5 from 51.7. Companies reported that domestic markets remain soft and that new export business growth was the weakest in more than a year. Average selling prices continued to fall, but the rate of decrease was the lowest since the start of the year. In services, confidence remained stable, at 53.1. In Germany, the Composite PMI increased to 54.7 in May from 53.6 in April, the first increase since the start of the year and with positive reports in both manufacturing and the services sectors. The French PMI showed a small improvement, particularly in services (51.8 in May from 50.6 in April) while the manufacturing sector softened slightly (48.3, the same as in April). In the rest of the Eurozone, preliminary estimates suggest deterioration in business confidence indicators in May. Overall, the second reading of the business confidence in Q2 suggests that Eurozone GDP growth will slow to +0.3% q/q.