Euro Showed No Reaction as Greek GDP Unexpectedly Grew in 2Q

Talking Points:

• Euro unaffected as Greek GDP unexpectedly grows in 2Q
• Positive 2Q GDP number possibly a function of deflation
• EU Finance Ministers to vote on new Greek bailout Friday

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The Euro was little-changed against its top counterparts after Greek GDP unexpectedly grew 1.5 percent y/y in the second quarter. The tepid reaction likely reflects the limited impact of the data on ECB monetary policy expectations. The central bank is injecting €60 billion/month into the economy through September 2016 in an effort to counteract deflationary threats.

A possible reason for the appearance of a positive GDP reading may be the persistent deflation since the February 2013. While GDP grew 0.8 percent q/q in inflation-adjusted (“real”) terms, nominal GDP fell by 0.7 percent. Subtracting a negative inflation rate from nominal GDP numbers creates the appearance of positive growth which is not necessarily indicative of the economy’s true performance.

Looking ahead, the Euro will look to a vote on the third Greek bailout by EU finance ministers, due to take place on August 14. Athens worked out a deal with its creditors worth up to €85 billion that must be voted upon and accepted in order to take effect. Worryingly, German Chancellor Angela Merkel is on record telling Greek Prime Minister Alexis Tsipras that is skeptical of the new rescue effort’s terms.