EMU: GDP Flash

October 31, 2016 05:00 CDT

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

The preliminary flash estimate put Eurozone economic growth at a 0.3 percent quarterly rate in the three months to September. The outturn, which matched market expectations, made for an annual rise in real GDP of 1.6 percent. Both rates were unchanged from their respective second quarter prints.

Eurostat provides only very limited information in this release and there are no details on the GDP expenditure components or even the individual member performances. Nonetheless, the headline data confirm that the Eurozone economy failed to pick up any real momentum during the summer months, consistent with what has been an essentially flat trend in underlying inflation.

The ECB will be relieved that the Brexit vote does not appear to have had much effect on economic activity at home but it must also be wondering what else it can do to put the economy into a higher gear and meet its inflation objectives. To this end, further monetary easing remains a possibility at the December policy-setting meeting.

Gross domestic product (GDP) is the broadest measure of aggregate economic activity and encompasses every sector of the economy. There are two preliminary estimates which are based on only partial data. The first is the preliminary flash, introduced in April 2016 and limited to just quarterly and annual growth statistics for the region as a whole. This is issued close to the end of the month immediately after the reference period. The second flash report, released about two weeks later, expands on the first to include growth figures for most member states but still provides no information on 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.