EMU: GDP Flash

July 29, 2016 04:00 CDT

Consensus Actual Previous
Quarter over Quarter 0.3% 0.3% 0.5%
Year over Year 1.5% 1.6% 1.5%

The preliminary flash estimate of second quarter GDP showed a sharp, but as expected, slowdown in economic growth. A 0.3 percent quarterly rise in total output was only half the previous period's print and matched the weakest gain since the second quarter of 2014. As a result, the annual rate of expansion dipped from an already modest 1.7 percent to 1.6 percent.

There are no country details in the preliminary flash report but stagnation in the French economy (see today's flash GDP report) was clearly a factor behind the headline deceleration. Germany also looks likely to have fallen well short of its 0.7 percent first quarter rate.

Obviously today's data cover the period before the Brexit vote and probably say little about how the Eurozone economy will perform this quarter. Business surveys have found little immediate impact from the referendum result but the relative softness of activity in the run-up means that the economy was at least potentially vulnerable. Certainly there is nothing here to stop the ECB mulling over another relaxation of policy come its meeting in September.

Gross domestic product (GDP) is the broadest measure of aggregate economic activity and encompasses every sector of the economy. This preliminary estimate is based on all the available information at the time but while this will include the majority of member states, it usually excludes some where local figures have yet to be compiled.

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.