GB: GDP


Wed Dec 23 03:30:00 CST 2015

Consensus Actual Previous
Quarter over Quarter 0.5% 0.4% 0.5%
Year over Year 2.3% 2.1% 2.3%

Highlights
The economy expanded at a slightly softer revised 0.4 percent quarterly rate in the July-September period. In turn, annual growth was shaded a couple of ticks to 2.1 percent.

As previously indicated, the quarterly gain in total output was mainly driven by household spending which was up 0.9 percent, a tick stronger than reported last time, ahead of gross fixed capital formation where, at 0.7 percent, growth was almost halved versus the previous estimate. Government consumption was also marked down quite sharply to 0.6 percent. Stock building still made a hefty positive contribution but the negative impact of net exports was pared to 1.0 percentage points as the current account deficit surprisingly narrowed to 3.7 percent of GDP from 3.8 percent in the second quarter.

As is usual will the final report, today's GDP update is already too historic to be of much interest to financial markets. Rather, the focus is on the current period and, in particular, any signs that the output gap has closed sufficiently to instil any meaningful inflationary pressures. To this end, despite some indications of a slightly faster pace of growth, underlying price trends remain becalmed and a weaker oil market will make for additional downside risk near-term.

The third quarter's slightly less negative net export performance may be a small plus for the pound but with Bank Rate still looking fixed at 0.5 percent well into next year, upside potential versus the dollar would appear very limited.

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.)