EMU: GDP Flash

Wed May 13 04:00:00 CDT 2015

Consensus Actual Previous
Quarter over Quarter 0.5% 0.4% 0.3%
Year over Year 1.1% 1.0% 0.9%

Eurozone economic activity extended its recovery into last quarter with a provisional and slightly smaller than expected 0.4 percent increase in real GDP versus the previous period. The fourth quarter rise was unrevised at 0.3 percent and annual growth edged a tick firmer to 1.0 percent. In line with normal procedure, Eurostat provided no details of the latest GDP expenditure components.

Growth was hindered by a sharp slowdown in Germany where total output expanded a quarterly 0.3 percent following a 0.7 percent rise at the end of last year. However, France (0.6 percent after 0.0 percent) was surprisingly robust and Spain (0.9 percent after 0.7 percent) posted its strongest performance in more than seven years. Italy (0.3 percent after 0.0 percent) saw its first positive print since the third quarter of 2013. Amongst the smaller countries Cyprus (1.6 percent after minus 0.4 percent) finally pulled out of recession but Finland (minus 0.1 percent after minus 0.2 percent) saw a second successive quarter of falling output.

Early signals on the current quarter have pointed to little change in Eurozone economic momentum which will probably be seen as disappointing by policymakers and investors alike. Still, the ECB's QE programme was only launched in March so much of its potential benefit has yet to be realised. That said, with the region's inflation currently running at just a provisional 0.0 percent annual rate, Eurozone governments and the ECB will be hoping for a significantly stronger growth profile over the second half of the year.

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.