EMU: GDP Flash

Tue Aug 01 04:00:00 CDT 2017

Consensus Actual Previous
Quarter over Quarter 0.6% 0.6% 0.5%
Year over Year 2.4% 2.1% 1.7%

The Eurozone had a good second quarter. The preliminary flash data show real GDP expanding 0.6 versus the January-March period when it grew a marginally weaker revised 0.5 percent. The outturn was in line with market expectations and equals the strongest increase in total output since the first quarter of 2015. Annual growth was 2.1 percent, an improvement on the 1.9 percent rate posted at the start of the year.

No details of individual country performance or the regional GDP expenditure components are available in this release. However, provisional national accounts data already announced showed French GDP up a quarterly 0.5 percent and Spain an impressive 0.9 percent. Germany was probably around the 0.5/0.6 percent mark too but Italy will have lagged again.

The ECB should be happy enough with today's outturn. The Eurozone economic recovery has clearly gained traction and, with a few expectations, looks to be becoming increasingly broad-based. However, it remains to be seen whether the rate of growth will be fast enough to give inflation the sustainable lift needed to meet the central bank's near-2 percent medium-term target.

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.