EMU: GDP Flash

Wed May 03 04:00:00 CDT 2017

Consensus Actual Previous
Quarter over Quarter 0.5% 0.5% 0.4%
Year over Year 1.7% 1.7% 1.7%

Eurozone growth was in line with expectations at the start of the year. Real GDP provisionally expanded 0.5 percent on the quarter, matching its upwardly revised rate at the end of 2016 and also equalling its best performance since the first quarter of last year. However, base effects saw the annual increase in total output slip a tick to 1.7 percent.

There are no additional details provided in the preliminary flash release. National data will be provided in the full flash report due 16th May while the key GDP expenditure components will not be available until 8th June.

The ECB should be quietly happy with today's headline data. However, without any information on where the growth has been generated, the report should have few immediate implications for monetary policy. That said, the likelihood of a positive revision to the central bank's 2017 growth forecast has been enhanced so financial markets should continue to contemplate the possibility of slightly less accommodative wording in the ECB's forward guidance come its meeting in June.

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.