Tue Apr 28 03:30:00 CDT 2015

Consensus Actual Previous
Quarter over Quarter 0.5% 0.3% 0.6%
Year over Year 2.6% 2.4% 3.0%

The UK economy decelerated surprisingly sharply last quarter. A provisional 0.3 percent quarterly increase in total output was well below market estimates and the smallest since real GDP started expanding at the start of 2013. Annual growth was 2.4 percent, some 0.6 percentage points short of its October-December print and also comfortably beneath the market consensus as well as its weakest pace since the fourth quarter of 2013.

Total output was hit by a 0.1 percent quarterly dip in industrial production, mainly reflecting a 2.1 percent slump in the volatile mining and quarrying subsector. Manufacturing output edged 0.1 percent higher. Service sector activity continued to increase but a 0.5 percent quarterly rise was little more than half of the fourth quarter gain as growth in business services and finance dropped to a minimal 0.1 percent from 1.3 percent last time. Elsewhere subsector performances were much in line with the previous period and distribution and hotels (1.2 percent) and transport, storage and communication (1.1 percent) again posted solid advances. Government services were up 0.3 percent after a flat fourth quarter.

Elsewhere, construction fell 1.6 percent, compounding the previous quarter's 2.2 percent decline to subtract 0.1 percentage points from headline growth and agriculture, forestry and fishing was off 0.2 percent after a 0.4 percent rise at the end of 2014.

The first quarter GDP results are surprisingly soft, not just from a market perspective but also compared to the BoE's February growth forecast (0.6 percent quarterly). It is not unusual for the preliminary outturn to be revised higher and, particularly in the light on what continue to be generally strong consumer and business surveys, it is very possible that last quarter will follow the same pattern. Nonetheless, as they stand the data give the BoE MPC's doves plenty of additional ammunition to justify holding Bank Rate at 0.5 percent for a good deal longer yet. The chances of a monetary tightening in 2015 just diminished a little further.

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.)