Fri Nov 27 03:30:00 CST 2015

Consensus Actual Previous
Quarter over Quarter 0.5% 0.5% 0.5%
Year over Year 2.3% 2.3% 2.3%

The economy expanded an unrevised 0.5 percent on the quarter in the period just ended. Annual growth similarly matched its provisional estimate at 2.3 percent. However, there were some worrying signs amongst the GDP expenditure components.

On the positive side, household spending rose a quarterly 0.8 percent for the third time in as many quarters. At the same time, gross fixed capital formation was up 1.3 percent, an improvement on the previous period's 1.0 percent increase and its third straight advance. Within this, business investment accelerated from 1.6 percent to a healthy 2.2 percent. Government final consumption also chipped in with a 1.3 percent rise. Even so, the relative buoyancy of final domestic demand failed to prevent a surge in inventories which alone added a full percentage point to the quarterly change in total output.

The other big negative was foreign trade. Hence, while exports rose a respectable enough 0.9 percent, imports climbed fully 5.5 percent, their largest quarterly increase since the first quarter of 2006. This meant net exports subtracted a record 1.5 percentage points from quarterly growth.

The lack of balance to the UK economy last quarter is a real issue for policymakers. With a global slowdown in place and no inflation, strong domestic demand is not a problem at this stage. However, the deterioration in the external accounts is another matter altogether and one that will reinforce the BoE's contention that the pound is significantly overvalued. Increasingly it looks as if sterling deprecation to boost export competitiveness and give a lift to domestic prices is the appropriate policy prognosis. Convincing financial markets that this is the best route to rebalance the economy may not be easy but in the meantime, the risk of a sharp fall in the pound medium-term continues to grow.

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.)