EMU: GDP


Tue Sep 08 04:00:00 CDT 2015

Consensus Actual Previous
Quarter over Quarter 0.3% 0.4% 0.4%
Year over Year 1.2% 1.5% 1.0%

Highlights
The Eurozone's flash estimate of second quarter economic growth was revised higher in the first full look at the region's national accounts. At 0.4 percent, the quarterly rate of expansion was up a tick versus its preliminary reading and strong enough to boost annual growth by 0.3 percentage points to 1.5 percent, its best performance since the second quarter of 2011. The first quarter was also revised firmer and now shows real GDP 0.5 percent higher than in the final quarter of 2014.

However, while the boost to headline growth is good news the GDP expenditure components confirm a disproportionately large contribution from oversea demand. Hence while household consumption also rose 0.4 percent on the quarter, gross fixed capital formation contracted 0.5 percent which, with government consumption up 0.3 percent, meant that domestic final sales added a just 0.2 percentage points to the quarterly change in total output. Inventories subtracted 0.1 percentage points.

Rather, by far the largest positive impact came from exports where a 1.6 percent quarterly bounce lifted GDP economic growth by some 0.7 percentage points. Imports were up 1.0 percent which left an overall net export contribution of 0.3 percentage points.

Amongst the individual member states, the strongest quarterly rise was registered in Latvia (1.2 percent) ahead of Malta (1.1 percent) and Spain (1.0 percent). Slovakia (0.8 percent) also had a good period and no country recorded a contraction. For the other larger economies Germany (0.4 percent) led the way ahead of Italy (0.3 percent) but France only stagnated and overall Eurozone growth had to rely heavily on the smaller countries. Finland saw its first increase in total output since the second quarter of last year.

The revised second quarter data make only cautiously positive reading. But for the help of exports the Eurozone economy would have been close to stagnation. Household consumption slowed for a second consecutive quarter and a renewed fall in investment does not bode well for future output. The economy seems to have turned the corner but the upswing remains quite sluggish. Talk of another ECB stimulus will not go away.

Definition
Gross domestic product (GDP) is the broadest measure of aggregate economic activity and encompasses every sector of the economy. The data are an aggregate for the 19 countries that currently comprise the Eurozone. This number is scheduled to increase over coming years.

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 typically lead to increased demand for a local currency. However, inflationary pressures can put downside pressure on a currency regardless of growth. For example, if inflation remains above the ECB’s near-2 percent target for long enough, worries about the impact of lost competitiveness on the merchandise trade balance could prompt investors to switch to an alternative currency.