GB: GDP


Thu Mar 31 03:30:00 CDT 2016

Consensus Actual Previous
Quarter over Quarter 0.5% 0.6% 0.5%
Year over Year 1.9% 2.1% 1.9%

Highlights
The final look at the UK's fourth quarter national accounts showed the economy superficially performing more strongly than originally thought. Quarterly real GDP growth was revised up a tick to 0.6 percent with the annual increase in total output was adjusted 0.2 percentage points higher to 2.1 percent.

Among the major GDP expenditure components household consumption still shows a 0.7 percent quarterly rise and continues to dominate the headline gain. However, gross fixed capital formation has been revised down to a drop of 1.1 percent from previously a 0.1 percent decline and government final consumption has been trimmed from a 0.5 percent rise to 0.3 percent. The impact of these changes is offset by a larger contribution from stock building; now put at 0.4 percentage points, a tick up on last time.

In addition, the real external accounts are not quite so negative as indicated earlier. Hence, a 0.1 percent rise in exports (previously minus 0.1 percent) and 0.9 percent increase in imports (1.2 percent) have reduced the hit on economic growth from 0.4 percentage points to 0.3 percentage points. Even so, at some 7.0% of GDP, the current account deficit was still a record high and a clear threat to the pound's longer-term outlook.

Fourth quarter growth was a little stronger than expected by the BoE (0.5 percent) but is now too historic to be of any real significance to monetary policy. Nonetheless the accounts reinforce the divergence between services (0.8 percent quarterly rise) and goods production (0.4 percent contraction) and net foreign trade position remains a major issue.

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.)