|Quarter over Quarter||0.4%||0.4%||0.6%|
|Year over Year||2.0%||2.1%||2.1%|
The UK economy provisionally slowed in line with expectations last quarter. A quarterly 0.4 percent rise in total output was down from an unrevised 0.6 percent increase in October-December but still firm enough to leave annual growth steady at 2.1 percent. Today's update puts real GDP 7.3 percent above its peak level just before the 2008/2009 recession.
No GDP expenditure components are available in the provisional data but the output statistics showed a 0.4 percent quarterly contraction in industrial production and falls of 0.9 percent in agriculture and 0.1 percent in construction. However, weakness here was more than offset by a 0.6 advance in services although even this was 0.2 percentage points below its fourth quarter pace.
The quarterly upturn in services came largely courtesy of a 1.3 percent rise in distribution, hotels and restaurants and a 1.0 percent increase in transport, storage and communication. Smaller gains were reported by business and finance (0.3 percent) and government and others services (0.5 percent).
There are no real surprises in this report which simply confirms the anticipated cooling in economic growth at the start of the year. Still, the slowdown may be seen as evidence of the impact of Brexit worries on economic activity in which case the second quarter is likely to be hit too. In any event, EU referendum uncertainty makes identifying underlying trends all the more problematic which, in itself, is reason for supposing that the BoE MPC will be in no hurry to change policy.
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.)