Tue Jul 28 03:30:00 CDT 2015

Consensus Actual Previous
Quarter over Quarter 0.7% 0.7% 0.4%
Year over Year 2.6% 2.6% 2.9%

The UK economy provisionally expanded at a 0.7 percent quarterly rate in the April-June period. The increase, which was in line with market expectations, followed an unrevised 0.4 percent gain in the first quarter and saw annual growth slip from 2.9 percent to 2.6 percent.

As usual with the preliminary figures, no details of the key GDP expenditure components were available but the output data showed solid contributions from both industrial production, which was up 1.0 percent on the quarter, and services, which matched the 0.7 percent headline gain. However, the robustness of the former masked a 0.3 percent decline in the key manufacturing sector (after a minimal 0.1 percent first quarter rise) and reflected instead a 7.8 percent surge in the volatile mining and quarrying subsector, possibly in part due to recent tax changes announced in the March Budget.

The quarterly advance in services was predicated upon solid increases in distribution, hotels and catering (0.9 percent), transport, storage and communication (0.8 percent) and business services and finance (also 0.8 percent). Government was up 0.2 percent.

Elsewhere construction was only flat and agriculture shrank 0.7 percent.

The second quarter figures leave total output 5.2 percent higher than its pre-economic downturn peak in the first quarter of 2008. Immediate implications for BoE policy should be slight as growth was in line with the central bank's own expectations. Nonetheless, with the pound uncomfortably strong and the manufacturing sector having lost considerable momentum so far this year, talk of higher UK interest rates still looks premature.

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.)