US – FOMC to maintain wait-and-see attitude

Greece – no progress this week

Eurozone – indicators point towards continued growth in 2Q 2015

US – highly unlikely to be any change to US monetary policy in upcoming week

Next week’s FOMC meeting is not expected to bring any change to monetary policy. Key interest rates are almost certain to remain unchanged. A rate change at the April meeting was labeled as unlikely at the previous meeting. Further, economic data released since then have been almost exclusively on the weak side. The market focus will be on any indications as to when the first hike could occur. We think that the FOMC’s new method of short-term guidance is an assessment of the likelihood of an interest rate change at the next meeting. Given the recent data, we assume that the chances for a rate hike will also be assessed as unlikely for the June meeting. Should this not be the case, the chances for a rate hike relatively soon would increase, which would surprise the markets. We expect the first rate hike in September. Other (less significant) guidance could come from any change in the economic assessment. At this meeting there will be no press conference and no new estimates of key macro variables by FOMC members.

Greece – deadline passed, negotiations continue

This week yet another deadline between Greece and its creditors has passed with no result. The original plan was for Greece to present a list of reforms to the institutions (European Commission, ECB, IMF), which would have been forwarded to finance ministers after evaluation. So the meeting of euro area finance ministers on April 24 brought no progress, but negotiations will continue. With respect to a new timetable for the conclusion of negotiations, there exist widely diverging statements from the responsible parties at present. These range from the end of April (Greek premier Tsipras) to mid-year (German finance minister Schäuble). In view of all the statements made to date, it appears as though Greece should manage to muddle on through to May and so default does not seem imminent. We believe that compromise – whatever form it may take – will be the most likely outcome of the negotiations and that Greece should remain in the Eurozone. For more detailed analyses concerning the Greek crisis, we refer you to our latest report on the issue. Due to recent developments, the markets have reduced their risk aversion and spreads of Italian, Spanish and Portuguese government bonds to Germany have narrowed.

Eurozone – slight decline of leading indicators after new highs in March

This week’s release of flash PMIs for April brought a slight decline in the survey data. However, the April poll data still remains above the average reading for 1Q15 and thus points towards continued growth of industrial activity in the Eurozone in 2Q15. On a regional level, the decline in France was the strongest, while survey data in all countries apart from Germany and France climbed to their highest levels since August 2007. The flash estimate of consumer confidence in the Eurozone for April came in slightly below the multi-year high of March. Consumer sentiment remains high and the April value is well above the 1Q15 average. The softness of the first leading indicators for 2Q15 is no surprise after the strong values seen in March. They nevertheless point towards continued growth of the Eurozone economy in 2Q15. Next week, the release of the unemployment rate for March (declined by 0.1% to 11.3% in February) will deliver further insights, should the recovery of the labor market have continued.

New budget strategy from Austrian government. Progress in reforms implementation

Earlier this week, the Council of Ministers reached agreement on the new medium-term expenditure framework. According to the newly-published report, government debt is expected to increase by 2.3% of GDP up to the level of 86.8% of GDP in 2015. The main reason for this increase is the fact that part of the assets of Kommunalkredit Austria AG could not be privatized and had to be added to the portfolio of the wind-down entity KA-Finanz AG, which is assigned to the state sector. Starting from 2016, the government debt-to-GDP ratio should gradually decrease to 79.7% of GDP in 2019, with the average annual rate of reduction being around 1.8%. The Maastricht deficit of the Republic of Austria will not be influenced by this reclassification of the Kommunalkredit Austria portfolio and will amount to 2.2% of GDP. Though this level is clearly higher than the planned figures published in the Austrian Stability Program from April as well as the Austrian Draft Budgetary Plan 2015 from October last year, the deficit should gradually reduce each year until it reaches 0.5% in 2019. The structural deficit should already this year reach the level of 0.5%.

The report also announces a certain amount of progress in terms of the implementation of reforms. The tax reform, which should enter into force in 2016, is planned to bring tax relief of EUR 5.2bn (1.5% of GDP). According to the Ministry of Finance, this will not burden the budget deficit but will be financed through reforms in public administration and subsidies, as well as measures against tax and social insurance fraud. A series of measures were also taken in the area of structural reforms. A study group which comprises all regional authorities should this year produce a final report identifying the potential for increasing efficiency and suggest appropriate measures. The introduction of a part-time pension was a first step towards reforms in the retirement and pension system. Further measures, such as the introduction of a plus/minus points system (Bonus/Malus) and reduction of non-wage labor costs are in the process of being implemented. A complete concept of further actions in the area of pensions and labor market should be ready by summer 2015. The ministry has also announced some measures against unemployment, such as government aid to integration into employment along with the creation of new and additional employment opportunities for, first of all, older and long-term unemployed. Taking into account the recently growing unemployment rate, these measures are of particular importance. Some further measures aimed at the increase of employment possibilities, such as more places for childcare and greater funds for short-term work are also planned.