Fri Jan 26 03:30:00 CST 2018

Consensus Actual Previous
Quarter over Quarter 0.4% 0.5% 0.4%
Year over Year 1.4% 1.5% 1.7%

The UK economy outperformed expectations at year-end. Quarterly growth of real GDP provisionally edged up to 0.5 percent, a tick higher than in the July-September period and its strongest mark since the fourth quarter of 2016. However, negative base effects saw the annual gain in total output slide from 1.7 percent to 1.5 percent, extending the downward trend that began in the second quarter of 2017 and equalling the weakest outturn since the second quarter of 2012.

The quarterly advance was driven by services where output expanded 0.6 percent. This mainly reflected 0.8 percent spurts in transportation, storage and communications as well as in business services and finance. Government was up 0.4 percent but distribution, hotels and restaurants rose just 0.1 percent, their worst performance in three quarters.

Elsewhere, overall industrial production increased 0.6 percent within which manufacturing gained an impressive 1.3 percent for a second successive quarter. The sector was held in check by a 3.9 percent slump in mining and quarrying where a shutdown in the key N. Sea Forties oil pipeline was a significant factor. Meantime, construction (minus 1.0 percent) contracted for a third straight quarter while agriculture forestry and fishing declined 0.4 percent.

The fourth quarter data may come as something of a surprise to the BoE which, according to the minutes of December's MPC meeting, thought quarterly growth could be softer than the third quarter. As such, they may prompt some members to adopt a somewhat more hawkish stance at February's gathering. Another hike in interest rates then still looks unlikely but the surprising buoyancy of the economy should still be good news for the pound.

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.)