Wed Oct 25 03:30:00 CDT 2017

Consensus Actual Previous
Quarter over Quarter 0.3% 0.4% 0.3%
Year over Year 1.4% 1.5% 1.5%

Economic growth edged a little firmer in the third quarter. A 0.4 percent quarterly rise in total output was a tick stronger than both the previous period's outturn and market expectations and also equalled the best performance since the second quarter of 2016. Even so, annual growth was flat at a relatively subdued 1.5 percent.

The quarterly headline advance partly reflected a rebound in industrial production which climbed a solid 1.0 percent to stand 2.7 percent above its level a year ago. Within this, manufacturing output was also 1.0 percent higher than in April-June. However, just as important was another 0.4 percent quarterly increase in service sector output. This was led by business services and the financial sector (0.6 percent). Distribution, hotels and catering grew by 0.4 transport, storage and communications 0.1 percent and government services also 0.1 percent.

Elsewhere, construction fell 0.7 percent but agriculture was up 1.0 percent.

Today's results compare favourably with the 0.3 percent quarterly GDP growth rate forecast by the BoE in its August Inflation Report. To this end, they may be seen as increasingly slightly the chances of a hike in official interest rates at next week's MPC meeting. That said, recent comments from MPC members have been less than hawkish so a tightening is still far from guaranteed.

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.)