GB: GDP


Fri Aug 28 03:30:00 CDT 2015

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

Highlights
The second estimate of economic growth last quarter showed no revisions to the preliminary report released in July. Hence, real GDP expanded 0.7 percent versus the January-March period when it grew 0.4 percent and was up 2.6 percent on the year, a drop of 0.3 percentage points from last time.

The first full look at the national accounts made for generally positive reading with all of the key components of domestic demand registering quarterly gains. Household consumption was up 0.7 percent after a 0.9 percent increase in the first quarter and within a 0.9 percent advance in gross fixed capital formation, business investment expanded a solid 2.9 percent, up from 2.0 at the start of the year. With government final consumption spending posting a second consecutive 0.9 percent increase, domestic demand would have been a good deal more robust but for a hefty drop in inventories.

Meantime, exports enjoyed a surprisingly robust period, rising 3.9 percent after a 0.4 percent gain previously. With imports up only 0.6 percent, this meant net trade added fully 1 percentage point to the quarterly change in total output.

Even so, prices were soft with the implied deflator rising a minimal 0.1 percent on the quarter, down from 0.3 percent last time and matching its weakest print since a fall in the third quarter of 2013.

Today's figures should go down reasonably well at the BoE. For a start the 0.7 percent quarterly rise in real GDP was in line with the Bank's own expectations and the modest shift away from household consumption towards investment points to a slightly better balance to the recovery. Moreover, the surge in exports suggests that perhaps the pound is not as badly overvalued as many might suppose. Certainly sterling should view a sizeable improvement in the real trade balance positively.

Nonetheless, prices were again soft last quarter and recent developments in the commodity markets argue against any meaningful pick-up this quarter. Bank Rate still looks to likely be on hold through the remainder of the year and an early hike in 2016 is far from assured.

Definition
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.

Description
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.)