EMU: GDP Flash

Tue Jan 30 04:00:00 CST 2018

Consensus Actual Previous
Quarter over Quarter 0.6% 0.6% 0.6%
Year over Year 2.6% 2.7% 2.5%

The Eurozone economy provisionally expanded at a 0.6 percent quarterly rate in the October-December period. This was in line with market expectations and down just a tick from a slightly stronger revised 0.7 percent pace in the third quarter. Annual growth was 2.7 percent, also only 0.1 percentage points short of its upwardly revised mark last time.

The preliminary flash report provides only summary growth statistics for the regional economy and no update on the key GDP expenditure components. However, national data already released suggest that the upswing was probably widespread. In particular, in terms of quarterly rates, France (0.6 percent) and Spain (0.7 percent) continued to enjoy a decent pace of expansion.

Today's data will come as no surprise to the ECB but should nevertheless be seen as additional confirmation of an increasingly well-established Eurozone economic upswing. Despite little evidence elsewhere of any change in underlying inflation trends, the more hawkish Council members will be all the keener to see at least a concrete end-date for the 2018 QE programme.

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.