Thu Feb 22 03:30:00 CST 2018

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

The economy expanded at a slightly slower revised 0.4 percent quarterly rate in the October-December period. Annual growth was similarly trimmed a tick and now stands at 1.4 percent. However, third quarter GDP was revised a little stronger to show a 0.5 percent quarterly rate.

The first look at the GDP expenditure components revealed that the quarterly rise in total output was driven by household spending and gross fixed capital formation. The former rose 0.3 percent, a tick short of its third quarter gain, but much in line with the rates seen since the middle of 2016. The latter was up 1.1 percent after 0.7 percent although within this, business investment was only flat which, following a 0.7 percent increase in the previous period, made for the weakest quarter of the year. Elsewhere, government spending was up 0.6 percent.

Meantime, net foreign trade deteriorated sharply and so had a sizeable negative impact. Exports fell 0.2 percent while imports rose 1.5 percent resulting in a hit to quarterly growth of some 0.5 percentage points. This compounded a 0.2 percentage point subtraction in the third quarter.

Despite the negative headline revision, today's updated GDP report is unlikely to have any major implications for BoE policy. The economy would have performed better but for the impact of net foreign trade and there is little that the Bank can do about that. Interest rates are still likely to be raised again by May.

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.)