Thu May 28 03:30:00 CDT 2015

Consensus Actual Previous
Quarter over Quarter 0.4% 0.3% 0.3%
Year over Year 2.5% 2.4% 2.4%

In contrast to expectations for a minor upward revision, the economy expanded an unrevised 0.3 percent on the quarter in the period just ended. This was the slowest quarterly growth rate since October-December 2012. The annual rate of expansion was 2.4 percent, also matching its provisional estimate and 0.6 percentage points short of its fourth quarter print.

The first look at the full national accounts confirmed a smaller contribution from household spending but only marginally as consumption was up 0.5 percent on the quarter after a 0.6 percent gain last time. More promisingly, gross fixed capital formation rebounded 1.5 percent after a 0.6 percent drop last time within which business investment was up 1.7 percent. Government expenditure was 0.6 percent stronger following a 0.2 percent dip.

Having boosted growth by almost a full percentage point in October-December, net exports subtracted some 0.9 percentage points last quarter, the largest negative impact since the third quarter of 2013. Export volumes were down 0.3 percent after a 4.6 percent jump previously while imports rose 2.3 percent, their third consecutive quarterly advance.

Following an average quarterly rate of almost 0.7 percent during the previous eight quarters, some deceleration in economic growth last quarter was probably overdue. Even then, the BoE MPC has indicated that it expects latest figure to be revised up to 0.5 percent. Early indications of economic activity this quarter have been generally pretty positive although apparently still not strong enough to trigger any significant increase in inflation pressures.

Although private sector domestic demand performed well in the first quarter, the overvaluation of sterling is becoming increasingly apparent in the net export data. The financial crisis in Greece and the ECB's recently introduced QE have significantly weakened the euro but without these factors the pound would probably be markedly weaker by now. Current levels of sterling do not look sustainable over the medium-longer term in the absence of higher UK interest rates.

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.)