EMU: GDP Flash

Wed Feb 14 04:00:00 CST 2018

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

The flash GDP estimate showed an unrevised 0.6 percent quarterly rate of expansion, down just a tick from the third quarter rate. Annual growth was 2.7 percent, also in line with the preliminary flash figure and similarly just 0.1 percentage points below the previous period's outturn.

Today's report still lacks details on the key GDP expenditure components but it does provide the first look at the economic performances of most of the individual Eurozone states. These showed another good period for three of the four larger members. On a quarterly basis, France and Germany both expanded 0.6 percent and Spain was up at 0.7 percent. Only Italy (0.3 percent) disappointed although, apart from France, growth rates cooled a little across the board. Elsewhere, there were notably strong performances from Lithuania (1.5 percent), Cyprus and Finland (both 1.1 percent). All reporting states saw positive growth, the weakest being Italy and Latvia (also 0.3 percent).

The unrevised headline data should leave financial markets unmoved but confirmation of a solid fourth quarter should help to sustain expectations of a robust start to 2018 too.

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.