FR: GDP Flash

Tue Oct 31 01:30:00 CDT 2017

Consensus Actual Previous
Quarter over Quarter 0.5% 0.5% 0.5%
Year over Year 2.1% 2.2% 1.8%

The economy enjoyed another decent quarter in July-September. Total output provisionally expanded 0.5 percent versus the second quarter, a tick short of that period's rate but in line with expectations and enough to lift annual growth by 0.4 percentage points to 2.2 percent, the fastest rate since 2011.

Final domestic demand added 0.6 percentage points to the quarterly change in real GDP, a tick more than in April-June. Within this, household spending accelerated from a 0.3 percent rate to 0.5 percent while a modest slowdown in gross fixed capital formation still left a respectable 0.8 percent gain. The latter reflected continued strength in both residential investment (1.1 percent after 1.4 percent) and business spending (0.9 percent after 1.1 percent). Elsewhere, government consumption was unchanged at a 0.4 percent rate.

However, not so promisingly, inventory accumulation added a sizeable 0.5 percentage points to quarterly growth which could dent output in the current period. In addition, a 0.7 percent increase in exports was more than offset by a 2.5 percent jump in imports to leave the net foreign trade balance subtracting fully 0.6 percentage points.

Accordingly, the composition of today's headline data is rather mixed. Crucially, domestic demand seems to have moved into a higher gear but the performance of the (real) trade balance will leave doubts about the competitiveness of French industry at current levels of the euro.

Gross domestic product (GDP) is the broadest measure of aggregate economic activity and encompasses every sector of the economy. The flash estimate, released a relatively short 4-5 weeks after the end of the reference quarter, is an effort to speed up delivery of key economic data. In contrast to most European flash releases, the French version provides an early look at 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.