FR: GDP Flash

July 29, 2016 12:30 CDT

Consensus Actual Previous
Quarter over Quarter 0.2% 0.0% 0.5%
Year over Year 1.6% 1.4% 1.3%

The economy unexpectedly ground to a halt in the April-June period. Following a slightly stronger revised 0.7 percent quarterly increase at the start of the year, real GDP was provisionally only flat at that quarter's level, the first time that it has failed to register positive growth since the second quarter of 2015. The annual rise in total output was a modest 1.4 percent.

The GDP expenditure components underlined the softness of internal demand and domestic final sales made a zero contribution to the quarterly change in GDP. Within this, household consumption slowed from the previous period's healthy 1.2 percent rate to also 0.0 percent and gross fixed capital formation contracted 0.4 percent, its first decline in a year. The fall here reflected weakness in both residential investment (minus 0.1 percent) and business spending (minus 0.2 percent). General government consumption increased 0.4 percent but inventories subtracted 0.4 percentage points after a small 0.1 percentage point hit last time.

In fact, the headline data would have been worse but for net foreign trade which provided an overdue boost to growth. Even then, a 0.3 percentage point lift only reflected a 0.3 percent quarterly drop in exports that was more than offset by a 1.3 percent decrease in imports.

The second quarter results are clearly disappointing and will add to doubts about the outlook for the Eurozone as a whole. Domestic demand is clearly a problem and falling investment hardly bodes well for future output. With business surveys suggesting little improvement in the current period, expect a widening performance gap with Germany and more pressure from the French economy for another ECB ease.

Gross domestic product (GDP) is the broadest measure of aggregate economic activity and encompasses every sector of the economy. The flash estimate, which will be released about 45 days after the quarter's end, is an effort to speed up delivery of key economic data. In contrast to most flash releases, the French version provides an early look at the 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 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.