GB: GDP


Tue Oct 27 04:30:00 CDT 2015

Consensus Actual Previous
Quarter over Quarter 0.6% 0.5% 0.7%
Year over Year 2.4% 2.3% 2.4%

Highlights
The UK economy provisionally slowed a little more quickly than expected in the third quarter. Hence, real GDP followed the second quarter's 0.7 percent quarterly rise with a 0.5 percent gain that shaded annual growth from 2.4 percent to 2.3 percent.

However, the slowdown in total output was largely due to weakness in the highly volatile construction sector where quarterly growth dropped from 1.4 percent to minus 2.2 percent. This was its worst performance since the third quarter of 2012 and alone subtracted 0.1 percentage points from total growth. That said, industrial production also cooled somewhat with a 0.3 percent advance after a 0.7 percent increase in April-June. Moreover, within this, manufacturing shrank 0.3 percent only to be offset by a 2.4 percent jump in mining and quarrying and a 1.2 percent increase in water and waste management. Nonetheless, relative underperformance here was mostly masked by the service sector which expanded a healthy 0.7 percent, up a tick from last time. Agriculture was also up 0.5 percent following a 0.4 percent advance previously.

The third quarter economy was a touch softer than expected by the Bank of England which forecast a 0.6 percent quarterly rate of expansion. However, the shortfall is too small to be of any policy significance at this stage, particularly with much of the hard data not yet available. Still, the report clearly underlines a drop in activity rates in manufacturing and overall goods production looks unlikely to provide much help to real GDP growth in the current period. Ultimately, services are more important to the UK economic recovery but, despite a decent performance here, on balance there remains little reason for expecting any early move on UK Bank Rate.

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.)