EMU: GDP


Thu Jun 07 04:00:00 CDT 2018

Consensus Actual Previous
Quarter over Quarter 0.4% 0.4% 0.6%
Year over Year 2.5% 2.5% 2.7%

Highlights
There were no revisions to quarterly economic growth in the third estimate of GDP for the start of the year. Total output is still seen up 0.4 percent, little more than half of the previous period's rate and equalling the weakest performance since the second quarter of 2015. The annual expansion rate was 2.5 percent, also matching last month's estimate and 0.3 percentage points short of its fourth quarter mark.

Nonetheless, the first look at the national accounts revealed that the quarterly deceleration was mainly was due to a sharp turnaround in the contribution from net foreign demand which masked some more positive aspects amongst the domestic expenditure components. In particular, household spending was up 0.5 percent, more than double the fourth quarter rate, and while gross fixed capital formation slowed (0.5 percent after 1.3 percent), growth remained firmly in positive territory. Elsewhere, government spending (0.0 percent after 0.3 percent) weighed slightly while business inventories (0.2 percentage points) provided a modest boost.

Rather, with exports falling 0.4 percent after a 2.2 percent surge and imports off 0.1 percent following a 1.5 percent bounce, net trade subtracted a tick from quarterly growth having added fully 0.4 percentage points last time.

Overall then, the first quarter GDP breakdown should be seen reasonably favourably. Stronger household spending is very welcome, if overdue, and another increase in investment is consistent with both rising business optimism and increasing pressures on capacity. The negative net export impact is too small to be of concern. Consequently, the implications ought to be that the Eurozone economy entered the current quarter in good shape. However, growth last quarter was heavily front-end loaded and while bad weather probably had some negative effect, business surveys have not found any rebound in activity levels so far this quarter. So, the bottom line is probably OK, but could be much better.

Definition
Gross domestic product (GDP) is the broadest measure of aggregate economic activity and encompasses every sector of the economy and is usually released early in the third month after the reference period. Following two provisional (flash) estimates containing only limited information, this report provides the first full look at the national accounts for the region.

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 typically lead to increased demand for a local currency. However, inflationary pressures can put downside pressure on a currency regardless of growth. For example, if inflation remains above the ECB’s near-2 percent target for long enough, worries about the impact of lost competitiveness on the merchandise trade balance could prompt investors to switch to an alternative currency.