EMU: GDP Flash

Tue Nov 14 04:00:00 CST 2017

Consensus Actual Previous
Quarter over Quarter 0.6% 0.6% 0.6%
Year over Year 2.5% 2.5% 2.5%

The flash Eurozone GDP estimate left quarterly economic growth in July-September unrevised at the 0.6 percent rate posted in the preliminary report. Compared with a year ago, total output was up 2.5 percent, also in line with its provisional outturn.

The full flash release still offers no information on the key GDP expenditure components but expands the very limited preliminary data to include a regional breakdown. This confirmed a generally good period for the largest four member states. Hence, quarterly growth in France was 0.5 percent, down just tick from the second quarter rate, while in Germany it climbed from an already respectable 0.6 percent to 0.8 percent. Spain (0.8 percent after 0.9 percent) was once again amongst the best performers and Italy (0.5 percent after 0.3 percent) also fared well by its recent standards.

Elsewhere Latvia (1.5 percent) and Finland (1.1 percent) stood out and, reassuringly, there were no contractions in national output.

The absence of any revision to the headline growth numbers should leave financial markets unmoved. Still, the narrowing performance gaps across the region bode well and, looking ahead, the aggregate economy appears to be on track for a decent fourth quarter. However, whether that proves to be good enough to put underlying inflation back on track remains to be seen. Today's German inflation update (see CPI calendar entry) warns that the ECB still has a sizeable job on its hands.

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.