EMU: GDP Flash

Fri Feb 13 04:00:00 CST 2015

Consensus Actual Previous
Quarter over Quarter 0.2% 0.3% 0.2%
Year over Year 0.8% 0.9% 0.8%

According to the flash data, Eurozone real GDP in the October-December period expanded a slightly larger than expected 0.3 percent versus the third quarter when growth was an unrevised 0.2 percent. Compared with the fourth quarter of 2013 total output was up 0.9 percent, a tick higher than last time.

As is usual with the provisional estimate, Eurostat provided no information on the details on the national accounts.

Amongst the larger four member states solid provisional quarterly expansion rates were posted by Germany and Spain (both 0.7 percent), the buoyancy of the former essentially responsible for the headline overshoot of market expectations. However, the French economy grew a minimal 0.1 percent and Italy only stagnated. Elsewhere Estonia (1.1 percent) enjoyed a very good quarter and there were respectable performances in Slovakia (0.6 percent) and the Netherlands and Portugal (both 0.5 percent). The only quarterly contractions were recorded in Greece (0.2 percent), Finland (0.3 percent) and Cyprus (0.7 percent) which remains mired in recession.

Although it remains to be seen which of the GDP expenditure components were responsible for the rise in total output, Eurozone policymakers will take heart from the fact that last quarter's gain matched the strongest since the region emerged from recession in the second quarter of 2013. Certainly, and no doubt much to Mario Draghi's relief, it suggests that for once the ECB will be able to revise up its growth projections in its next set of economic forecasts.

That said, headline growth is still far too sluggish and, if sustained, likely to make only a limited impression on unemployment. Moreover, the sizeable performance gap within the core group is a major hurdle for Eurozone policy and will leave the Bundesbank and Merkel government all the more convinced that the stance in Germany should not be overly accommodative. Irrespective of QE, the Eurozone economy will more than welcome the slump in energy costs and fall in the value of the euro.

Gross domestic product (GDP) is the broadest measure of aggregate economic activity and encompasses every sector of the economy. This preliminary estimate is based on all the available information at the time but while this will include the majority of member states, it usually excludes some where local figures have yet to be compiled.

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 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 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 anaemic 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.