January 26, 2017 03:30 CST

Consensus Actual Previous
Quarter over Quarter 0.5% 0.6% 0.6%
Year over Year 2.1% 2.2% 2.2%

Earlier pessimistic predictions about how last June's Brexit vote would hit the UK economy were again undermined by the provisional fourth quarter GDP data. Total output expanded a solid 0.6 percent versus the July-September period, matching the previous period's gain and slightly beating market expectations. Annual growth was similarly steady at 2.2 percent.

Since this is the first estimate, no details on the GDP expenditure components were available but the ONS did point to a strong performance by consumer-focussed industries such as retail sales and travel agencies. Distribution, hotels and restaurants (1.7 percent) were again especially strong. Amongst the main sectors, services were up a quarterly 0.8 percent, alone adding 0.6 percentage points to the headline change, while construction edged 0.1 percent higher and agriculture 0.4 percent. Industrial production was only unchanged but within this, the key manufacturing category advanced a respectable 0.7 percent.

Today's data mean that the economy (again) provisionally outperformed the BoE MPC's expectations which were for a quarterly rate of only 0.4 percent. This further increases the risk of a hike in Bank Rate before the year is out. Certainly, financial markets will now be all the more sensitive to any surprisingly strong inflation news. That said, the central bank has indicated that it is in no rush to tighten, not least because it still anticipates a potentially sharp slowdown in growth over coming quarters as the fallout from Brexit uncertainty finally begins to take its toll.

Gross domestic product (GDP) is the broadest measure of aggregate economic activity and encompasses every sector of the economy. The first, or provisional, estimate will only include a breakdown in terms of the main output sectors. Subsequent estimates will provide details of the key GDP expenditure components and full national accounts.

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 lead to increased demand for a local currency. However, inflationary pressures put pressure on a currency regardless of growth. For example, if the UK reports that the consumer price index has risen more than the Bank of England's 2 percent inflation target, demand for sterling could decline. Similarly, when the Bank of England lowers interest rates, the pound sterling weakens. (Currency traders also watch the interest rate spread between countries.)