GB: GDP


Wed Sep 30 03:30:00 CDT 2015

Consensus Actual Previous
Quarter over Quarter 0.7% 0.7% 0.7%
Year over Year 2.6% 2.4% 2.6%

Highlights
The second revision to second quarter economic growth contained no surprises. Total output is still shown expanding 0.7 percent on the quarter after an unrevised 0.4 percent gain at the start of the year. However, adjustments to earlier data saw annual growth lowered from the 2.6 percent estimated last time to 2.4 percent.

As previously indicated, quarterly growth was heavily weighted towards the external sector, only now even more so. Hence, a 1.9 percent rise in exports combined with a 2.7 percent drop in imports to see net exports add fully 1.4 percentage points to the quarterly change in total output. Indeed, at 3.6 percent, down from 5.2 percent in the January-March period, the current account deficit as a percent of GDP was the smallest since the second quarter of 2013.

Domestic demand was buoyed mainly by an upwardly revised 0.8 percent increase in household consumption but a 1.6 percent bounce in business investment (revised down from 2.9 percent) also provided useful support. In fact, with government final consumption up 0.4 percent, overall growth would have been significantly higher but for a substantial rundown in stocks (total gross capital formation slumped 7.1 percent).

Despite their slightly less positive composition, the revised second quarter national accounts are too old now to be of any real interest to financial markets. Much more importantly, at around 0.5 percent, the third quarter looks to be shaping up OK although there may be some downside risk due to a possible sharp reversal in the net export contribution.

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.)