EMU: GDP Flash

Fri Nov 13 04:00:00 CST 2015

Consensus Actual Previous
Quarter over Quarter 0.4% 0.3% 0.3%
Year over Year 1.7% 1.6% 1.2%

The Eurozone economy provisionally grew at a sluggish 0.3 percent quarterly rate in the period just ended. The increase in real GDP, which followed an unrevised 0.4 percent rise in April-June, was on the low side of market expectations and only nudged annual workday adjusted growth a tick firmer to 1.6 percent.

As usual Eurostat provided no details of the GDP expenditure components but the likelihood is that a small negative contribution from net exports masked another moderate increase in final domestic demand.

The core countries again failed to impress. France at least improved from no growth at all in the second quarter to a modest enough 0.3 percent advance but, in matching that rate, the German economy only slowed versus the previous period (0.4 percent). Elsewhere, Italy saw a surprisingly small 0.2 percent gain but Spain, despite some deceleration from the second quarter's 1.0 percent rate, expanded a very respectable 0.8 percent. Amongst the smaller member states, Cyprus and Lithuania (both 0.5 percent) beat the average but Finland (minus 0.6 percent) as well as Estonia and Greece (both minus 0.5 percent) struggled while Portugal only stagnated.

Today's data really just point to more of the same for the Eurozone economy. The ECB's easing to date may well have helped to support economic growth but there has been no real pick up in momentum this year and the recovery remains anaemic. With inflation running at just zero last month, the need for additional policy stimulus is clear enough. Financial markets would be more than a little disappointed should the ECB not loosen the monetary reins again next month.

Gross domestic product (GDP) is the broadest measure of aggregate economic activity and encompasses every sector of the economy. This preliminary estimate is based on all the available information at the time but while this will include the majority of member states, it usually excludes some where local figures have yet to be compiled.

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 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 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 anaemic 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.