Thu Feb 26 03:30:00 CST 2015

Consensus Actual Previous
Quarter over Quarter 0.5% 0.5% 0.5%
Year over Year 2.7% 2.7% 2.7%

The economy expanded an unrevised 0.5 percent on the quarter in October-December, down from 0.7 percent in the previous period. Annual growth was also confirmed at 2.7 percent.

The first look at the GDP expenditure components revealed a respectable 0.5 percent quarterly rise in household consumption, a couple of ticks short of its third quarter pace but in line with its second quarter rate. However, within a disappointing 1.2 percent drop in gross capital formation, fixed investment was down 0.5 percent as spending by businesses contracted a further 1.4 percent after a 1.2 percent slide in the previous period. Weakness in oil and gas was a major factor here. General government consumption was flat, the first quarter that it has not grown in a year, and business inventories had a broadly neutral impact.

In fact total output would have struggled to keep its head above water but for a marked contribution from external trade. Hence, with exports rising 3.5 percent, their best performance since the second quarter of 2013, and imports gaining only 1.3 percent, net foreign trade added fully 0.6 percentage points to quarterly growth.

Inflation developments were soft. Thus, the GDP deflator matched the 0.1 percent quarterly dip seen in the third quarter to lower the whole economy annual inflation rate by 0.8 percentage points to just 1.1 percent. The comparable measure for domestic expenditure was weaker still; registering a 0.2 percent quarterly fall and a 0.7 percent yearly rate, down from 1.3 percent last time.

The fourth quarter national accounts make for rather disappointing reading. Growth was clearly very lopsided and the ongoing contraction in business investment is a cause for concern. Certainly, with inflation so weak there is nothing here for the BoE MPC's hawks to rile about. That said, while somewhat mixed, recent monthly economic indicators have generally been on the firm side and, in particular, business surveys have been surprisingly robust. The first quarter of 2015 should still look decent enough.

Gross domestic product (GDP) is the broadest measure of aggregate economic activity and encompasses every sector of the economy. The first, or provisional, estimate will only include a breakdown in terms of the main output sectors. Subsequent estimates will provide details of the key GDP expenditure components.

GDP is the all-inclusive measure of economic activity. Investors need to closely track the economy because it usually dictates how investments will perform. Stock market Investors like to see healthy economic growth because robust business activity translates to higher corporate profits. The GDP report contains a treasure-trove of information which not only paints an image of the overall economy, but tells investors about important trends within the big picture. These data, which follow the international classification system (SNA93), are readily comparable to other industrialized countries. GDP components such as consumer spending, business and residential investment, and price (inflation) indexes illuminate the economy's undercurrents, which can translate to investment opportunities and guidance in managing a portfolio.

Each financial market reacts differently to GDP data because of their focus. For example, equity market participants cheer healthy economic growth because it improves the corporate profit outlook while weak growth generally means anemic earnings. Equities generally drop on disappointing growth and climb on good growth prospects.

Bond or fixed income markets are contrarians. They prefer weak growth so that there is less of a chance of higher central bank interest rates and inflation. When GDP growth is poor or negative it indicates anemic or negative economic activity. Bond prices will rise and interest rates will fall. When growth is positive and good, interest rates will be higher and bond prices lower.

Currency traders prefer healthy growth and higher interest rates. Both lead to increased demand for a local currency. However, inflationary pressures put pressure on a currency regardless of growth. For example, if the UK reports that the consumer price index has risen more than the Bank of England's 2 percent inflation target, demand for sterling could decline. Similarly, when the Bank of England lowers interest rates, the pound sterling weakens. (Currency traders also watch the interest rate spread between countries.)