Thu Nov 23 03:30:00 CST 2017

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

Third quarter real GDP expanded an unrevised 0.4 percent versus the April-June period to leave annual growth at 1.5 percent, also in line with its provisional estimate.

The GDP expenditure components were mixed. On the optimistic side, household spending rose a quarterly 0.6 percent, a marked improvement on the second quarter's 0.2 percent gain and equalling its strongest performance since the second quarter of 2016. However, gross fixed capital formation slowed from a 0.6 percent rate to just 0.2 percent, its weakest print since the end of 2015 as growth of business investment (0.2 percent after 0.5 percent) more than halved. Government spending was up 0.3 percent after 0.1 percent while business inventories added some 0.5 percentage points to the change in total output.

The headline data would have looked a good deal better but for a sharp worsening in external trade. With exports down a quarterly 0.7 percent and imports up 1.1 percent, net exports subtracted 0.5 percentage points. This more than offset the second quarter's 0.4 percentage point boost and must be seen as disappointing in the wake of the global economic recovery and the post-EU referendum slide in sterling.

Today's report suggests that worries about a possible sharp decline in consumer spending were overblow, at least so far. This should leave the majority of BoE MPC members more comfortable with their decision to hike interest rates earlier this month. That said, economy-wide inflation is falling. The annual rate of the GDP deflator was 3.2 percent at the end of 2016 but has fallen from 2.5 percent at the start of this year to 2.1 percent in the second quarter and 1.9 percent in the quarter just ended. This hardly argues in favour of any additional near-term monetary tightening. In addition, slowing business investment is clearly bad news and the (real) current account remains a major problem. The UK economic outlook remains very clouded.

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.)