Group Economics
Macro Weekly
When Yanis met Wolfgang
Nick Kounis +31 20 343 5616
6 February 2015
The Greek finance minister Yanis Varoufakis met his German counterpart Wolfgang Schaeuble this week. Although it was a
frosty meeting, we think that a new deal for Greece is actually becoming more reachable. Before that, the big concern is the
liquidity of the Greek government and the country’s banks. Meanwhile, a whole range of economic data suggest that
economic prospects for the eurozone are brightening. We have revised our forecasts for GDP growth upwards and are now
even further above consensus. In contrast, we have revised down our forecasts for government bond yields and the euro.
Finally, the strong US labour market report keeps the Fed on track to raise interest rates around the middle of the year.
Probably not the beginning of a beautiful friendship
On the surface, the meeting between the Greek finance
minister Yanis Varoufakis and his German counterpart
Wolfgang Schaeuble was far from a big success. Mr.
Schaeuble said afterwards that the two of them ‘agreed to
disagree’. However, Mr. Varoufakis did not even agree with
that, saying ‘we didn’t even agree to disagree’. So it was not
exactly ‘love at first sight’.
A deal looks to more reachable
Despite this uncomfortable meeting, a deal has recently
become more feasible. Greece previously rejected the idea of
a Euro-IMF adjustment programme. Yet at the press
Greek banks will turn to emergency lending
Greek bank borrowing from ECB and Bank of Greece, EUR bn
180
160
140
120
100
80
60
40
20
0
Jan-11
Jan-12
Jan-13
MRO + LTRO
Jan-14
ELA
Source: Thomson Reuters Datastream, ABN AMRO Group Economics
conference, the Greek finance minister said that the country
was looking a ‘bridging programme’ to tide it through until a
Liquidity key before deal is reached
new deal was struck. He also said he agreed with 70% of what
A big issue in the meantime is liquidity for the Greek
was in the old programme. This suggests there is even more
government. Greece does not plan to take fresh funds under
negotiating room than previously.
the existing Euro-IMF programme. This means the government
will have to finance itself up to the point a deal is reached,
The three elements of a new agreement
muted to be end May. Up to then, the government has T-bills
We think a new deal will have three pillars. First, a new reform
maturing of EUR 9.5bn.
programme, with more emphasis on tackling tax evasion and
vested interests, and less on welfare and social spending cuts.
ECB pushes Greek banks to ELA
Although the previous government implemented many reforms,
Liquidity for the Greek banks – which will help finance the
these were areas it tackled rather half-heartedly.
government by buying T-bills – is also a question mark. The
ECB decided earlier this week to no longer accept Greek
Second, debt relief for Greece, perhaps in steps, conditional
government bonds as collateral in its refi operations. This
on reform progress. Help on this front was already promised to
means that Greek banks will turn to Emergency Lending
Greece in November 2012 by the Eurogroup. Greece’s debt
Assistance (ELA), which is liquidity provided by the Greek
burden does not look sustainable under reasonable
central bank, at its own risk.
assumptions.
Reports suggest a EUR 60bn limit
Third, a lower primary budget surplus target (fiscal balance ex.
German media reports suggest that the ELA limit will be EUR
interest payments). The current target is for a surplus of 4.5%
60bn, which would allow the Greek banks some breathing
GDP in 2016-2017 and 4% beyond that, levels that are very
space in the near term. They currently borrow EUR 56bn in
rare historically for any country. Greece’s surplus for 2014 is
normal refis. The banks have assets apart from Greek
estimated 1.5% GDP. A lower target would fit with the lower
government bonds, which would allow them to borrow an extra
level of debt and allow less aggressive fiscal consolidation.
2
Macro Weekly - When Yanis met Wolfgang - 6 February 2015
EUR 20bn in regular operations (so EUR 80bn total
by 0.9% qoq. Meanwhile, car registrations were up by 2.1%
borrowing). They need the space given that there is significant
qoq last quarter, a sign that other areas of consumer demand
deposit withdrawal underway, while they will also may be
are also doing well.
pressured to finance the government. However, the situation is
clearly fragile and cannot go on in this manner for a long
This is not what a deflationary spiral is meant to look like
period.
This is why the oil-driven falls in consumer prices can be seen
as ‘good deflation’. Falling prices – driven by the collapse in oil
Governing Council can block, but hurdle is high
prices – are giving consumer spending a lift. This appears to
The ECB’s Governing Council can restrict ELA to the Greek
contradict worries about a deflationary spiral, which would be
banks if it judges that it interferes with the ‘objectives and tasks
characterised by falling prices leading to consumers cutting
of the Eurosystem’. However, the Council would need a two-
back spending.
thirds majority to block ELA. In addition, it would be a very big
step as it would throw Greece’s financial system and economy
Labour market improving, German industry on the up
into chaos, potentially increasing the risk of a euro exit. Given
The fall in oil prices should be seen as a tax cut and a rather
this, we think most Governing Council members would keep
big one at that. It will provide support to consumer spending for
liquidity provision available until there is a clarity in terms of the
a number of months, but then the effects will fade. For a
political negotiations.
sustained recovery, the labour market needs to improve.
Fortunately, there are signs this is happening. The composite
Europe’s consumers get boost from oil
jobs PMI rose to 51 in January from 50.8 in December, the
Retail sales, % yoy
highest since July and before that September 2011. Job
growth is still slow, but is heading in the right direction.
4.0
3.0
2.0
1.0
0.0
-1.0
-2.0
-3.0
-4.0
-5.0
To top off the good news, German factory orders jumped in
December. This is a volatile series, but both orders and output
accelerated for Q4 as a whole. Capital goods orders led the
way, suggesting that investment should also firm going
forward.
04
06
08
10
12
14
US labour continues going strong
The US economy has been performing strongly over recent
Source: Thomson Reuters Datastream, ABN AMRO Group Economics
quarters and this is very visible in the labour market. Nonfarm
payrolls rose by 257K in January after an upwardly revised
We have revised our eurozone growth forecast upwards
329K jump in December. The 3-month average for job growth
Despite the risks in Greece, we have become more optimistic
is at its highest since 1997! Disappearing labour market slack
on the outlook for the eurozone economy. We have revised our
is starting to push up wage growth. Average hourly earnings
GDP forecasts to reflect lower oil prices, the decline in the euro
accelerated to 2.2% yoy in January from 1.9% in December.
and the general easing of financial conditions brought about by
the ECB’s QE programme. We now see GDP growing by 1.6%
Fed on track to raise interest rates this year
this year and 2.2% next (previously: 1.5 and 1.9%
The labour market report confirms that the Fed is on track to
respectively).
raise interest rates in the coming months. We think that the
move will likely be in June of this year. A lot now hangs on
Although the revision for the annual average for this year is
core inflation, which was weak in December. A January
only slight, this disguises a more significant revision to the
rebound (data are out later this month) would confirm that the
quarterly profile. If we are right the relatively downbeat
Fed will start to normalise its policy rates in the Summer.
consensus will be surprised positively.
Government bond yields revised lower
Eurozone data point to brighter economic outlook
We have made revisions to our interest rate and currency
Reports out of the eurozone this week suggested that the
forecasts. Given the upward revisions in our eurozone
economic recovery is building some momentum. Annual retail
economic growth forecasts, it is perhaps surprising that our
sales growth rose to 2.8% in December, the highest since
revisions for bond yields are going in the opposite direction.
March 2007. In the fourth quarter alone, retail sales were up
We now expect 10y Bund yields to end the year close to
3
Macro Weekly - When Yanis met Wolfgang - 6 February 2015
current levels at 0.4%, rather than 1% previously. However, we
Easier monetary policy around the world, ongoing strong US
think that on 3-month horizon, the yield will fall further, to reach
demand and lower oil prices are good reasons to expect firmer
just 10bp.
global growth in the months ahead.
Acute scarcity due to ECB and weak supply
US employment growth going strong
The ECB’s large scale government bond purchases, in
Nonfarm payrolls, 3-month moving average, 000s mom
combination with low net supply of core bonds, will create a
situation of acute scarcity (our Euro Sovereign Playbook 2015:
‘Acute scarcity of AAA bonds’ published today contains more
on this subject). This situation will also continue to dampen US
10y Treasury yields, which will look increasingly attractive. Our
end of year forecast is now 2.1%, down from 2.7% previously,
implying a more modest rise, even given Fed rate hikes.
600
400
200
0
-200
-400
-600
EUR/USD set to fall further
We also expect the EUR/USD to fall even further. We see it at
1.05 at year-end and 0.95 at the end of next year (previously:
-800
91 93 95 97 99 01 03 05 07 09 11 13 15
Source: Thomson Reuters Datastream, ABN AMRO Group Economics
1.10 and 1.00 respectively). A gradual rise in Fed policy rates
this year will contrast sharply to aggressive ECB balance sheet
expansion. The lessons from the US experience, is that the
currency falls during QE as well as in anticipation of the
programme.
Global monetary easing cycle continues
The US aside, most major central banks around the world
remain in full monetary easing mode. The Reserve Bank of
Australia cut its cash rate target to 2.25% from 2.5%. The
correction in commodity prices over the last few months is still
hurting the economy, and the central bank is taking steps to
underpin the non-mining sectors.
The People’s Bank of China to cut its reserve requirement ratio
(RRR) for the country’s commercial banks by 50bp. This
further loosening in liquidity conditions reflects that the
authorities continue to take modest easing steps to keep the
economy on the path of a soft landing. We expect further
easing going forward in the shape of interest rate cuts. Our
base scenario is that China’s economy slows to 7% this year,
compared to 7.4% last year.
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2
Macro Weekly - When Yanis met Wolfgang - 6 February 2015
Main economic/financial forecasts
GDP grow th (%)
2013
2014e
2015e
2016e
+3M
+12M
2015e
2.4
2.4
3.8
3.0
United States
0.25
0.26
0.4
1.4
1.4
3.0
-0.4
0.9
1.6
2.2
Eurozone
0.05
0.06
0.05
0.05
0.05
0.05
Japan
1.6
0.4
1.6
1.2
Japan
0.17
0.17
0.2
0.2
0.2
0.2
United Kingdom
1.7
2.6
2.8
2.6
United Kingdom
0.56
0.56
0.6
1.2
1.2
2.2
China
29/01/2015 05/02/2015
United States
Eurozone
3M interbank rate
29/01/2015 05/02/2015
2016e
7.7
7.4
7.0
7.0
World
Inflation (%)
3.2
2013
3.2
2014e
3.5
2015e
3.8
2016e
+3M
+12M
2015e
2016e
United States
1.5
1.6
1.0
1.8
US Treasury
1.76
1.82
1.8
2.1
2.1
2.9
Eurozone
1.3
0.5
0.2
1.5
German Bund
0.36
0.38
0.2
0.4
0.4
1.0
Japan
0.3
2.8
1.0
1.4
Euro sw ap rate
0.74
0.71
0.6
0.9
0.9
1.3
United Kingdom
2.6
1.5
1.1
1.9
Japanese gov. bonds
0.29
0.36
0.5
0.7
0.7
1.0
China
2.6
2.0
2.0
2.5
UK gilts
1.42
1.55
1.5
2.4
2.7
3.2
World
Key policy rate
4.3
05/02/2015
4.0
+3M
3.5
2015e
3.6
2016e
29/01/2015 05/02/2015
+3M
+12M
2015e
2016e
Federal Reserve
0.25
0.25
1.00
3.00
EUR/USD
1.13
1.14
1.12
1.05
1.05
0.95
European Central Bank
0.05
0.05
0.05
0.05
USD/JPY
118.3
117.5
122
130
130
140
Bank of Japan
0.10
0.10
0.10
0.10
GBP/USD
1.51
1.53
1.47
1.40
1.40
1.36
Bank of England
0.50
0.50
1.00
2.00
EUR/GBP
0.75
0.75
0.76
0.75
0.75
0.70
People's Bank of China
5.60
5.35
5.10
5.10
USD/CNY
6.25
6.25
6.23
6.27
6.27
6.35
10Y interest rate
Currencies
Source: Thomson Reuters Datastream, ABN AMRO Group Economics.
KEY MACRO EVENTS
Day
Date
Sunday
Sunday
08/02/2015
08/02/2015
Monday
Monday
09/02/2015
09/02/2015
Tuesday
Tuesday
Tuesday
Tuesday
Tuesday
Tuesday
Tuesday
Tuesday
Tuesday
Time
Country
Key Economic Indicators and Events
Period
Latest outcome
Consensus
CN
CN
Exports - % yoy
Imports - % yoy
Jan
Jan
9.7
-2.4
5.7
-3.2
00:50:00
07:00:00
JP
JP
BOP Current account - JPY bn
Economy Watchers Survey - index
Dec
Jan
433.0
45.2
354.8
10/02/2015
10/02/2015
10/02/2015
10/02/2015
10/02/2015
10/02/2015
10/02/2015
10/02/2015
10/02/2015
01:01:00
02:30:00
09:15:00
10:00:00
15:00:00
16:00:00
15/02/2015
15/02/2015
15/02/2015
GB
CN
CH
NO
US
US
CN
CN
CN
BRC Retail sales - % yoy
CPI - % yoy
CPI - % yoy
CPI - % yoy
NFIB small business optimisme - index
US Job Openings by Industry
M2 money growth - % yoy
New yuan loans - CNY bn
Aggregate financing - CNY bn
Jan
Jan
Jan
Jan
Jan
Dec
Jan
Jan
Jan
-0.4
1.5
-0.3
2.4
100.4
4972
12.2
697.3
1694.5
0.7
1.0
-0.6
Wednesday
11/02/2015
10:00:00
NO
GDP - % qoq
4Q
0.5
Thursday
Thursday
Thursday
Thursday
Thursday
Thursday
Thursday
Thursday
12/02/2015
12/02/2015
12/02/2015
12/02/2015
12/02/2015
12/02/2015
12/02/2015
12/02/2015
00:50:00
01:01:00
08:00:00
09:30:00
09:30:00
11:00:00
14:30:00
16:00:00
JP
GB
DE
NL
SE
EC
US
US
Machinery orders private sector - % mom
RICS house price balance - %
CPI - % yoy
CPI - % yoy
Policy rate - %
Industrial production - % mom
Retail sales - % mom
Business inventories - % mom
Dec
Jan
Jan F
Jan
Feb 12
Dec
Jan
Dec
1.3
11
-0.3
0.7
0.0
0.2
-0.9
0.2
Friday
Friday
Friday
Friday
Friday
13/02/2015
13/02/2015
13/02/2015
13/02/2015
13/02/2015
07:30:00
08:00:00
09:30:00
11:00:00
16:00:00
FR
DE
NL
EC
US
GDP - % qoq
GDP - % qoq
GDP - % qoq
GDP - % qoq
Univ. of Michigan cons. confidence - index
4Q P
4Q P
4Q P
4Q A
Feb P
0.3
0.1
0.1
0.2
98.1
ABN AMRO
101.5
12.1
1350.0
2050.0
2.1
10
-0.3
0.0
0.3
-0.2
0.1
0.2
0.2
98.4
0.5
0.0
-0.3
0.1
0.4
0.4
0.3
98.5
Source: Bloomberg, Reuters, ABN AMRO Group Economics (we provide own forecasts only for selected k ey variables and events)
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