FR: GDP Flash

October 28, 2016 12:30 CDT

Consensus Actual Previous
Quarter over Quarter 0.3% 0.2% 0.0%
Year over Year 1.1% 1.4%

Real GDP provisionally expanded at a slightly slower than expected 0.2 percent quarterly rate in the three months to September. The rebound, from an unrevised 0.1 percent contraction in the previous period, reduced annual growth from 1.3 percent to 1.1 percent, equalling its weakest mark since the fourth quarter of 2014.

The quarterly increase in total output would have been much more significant but for a sizeable reversal in net external trade where a 0.6 percent rise in exports was swamped by a 2.2 percent jump in imports. Combined, the effect was to subtract some 0.5 percentage points off quarterly growth following a 0.6 percentage point lift in the second quarter.

However, even ignoring this hit, the main boost to output only came from inventories which added an ominously large 0.6 percentage points. Disappointingly, final domestic demand contributed only a minimal 0.1 percentage points, matching its meagre second quarter impact. Within this, household spending was only flat for a second successive quarter and non-financial business investment again declined 0.3 percent. More positively, residential investment was up a useful 0.8 percent and government current spending gained 0.4 percent.

Looking ahead, the external balance is unlikely to be anything like as negative through year-end but the run-up in stocks last quarter will no doubt act as a dampener on output this quarter. Certainly, producers will want to see a much better performance by the key elements of private sector demand if they are to feel comfortable about a meaningful near-term step-up in production.

Gross domestic product (GDP) is the broadest measure of aggregate economic activity and encompasses every sector of the economy. The flash estimate, released a relatively short 4-5 weeks after the end of the reference quarter, is an effort to speed up delivery of key economic data. In contrast to most European 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.