DE: GDP Flash

Wed Feb 14 01:00:00 CST 2018

Consensus Actual Previous
Quarter over Quarter 0.6% 0.6% 0.8%
Year over Year 3.0% 2.9% 2.8%

The economy closed out 2017 in decent shape. Fourth quarter real GDP provisionally expanded 0.6 percent versus the previous period, down from the third quarter's marginally weaker revised 0.7 percent rate but respectable enough and in line with market expectations. Workday adjusted annual growth was 2.9 percent, up from 2.7 percent last time and the fourth rise in as many quarters. Unadjusted, total output was 2.3 percent above its level a year ago.

Being the flash report, there are few details on the GDP expenditure components. However, the FSO did indicate that quarterly growth came mainly from exports which had a particularly good period. Government consumption also made ground as did investment in machinery and equipment. However, household spending was only flat and capital formation was down.

The slowdown in consumer demand is surprising in the context of a very strong labour market and near record levels of consumer confidence so some pick-up here is likely this quarter. Exports are clearly responding to the improving global economy and, subject to the euro not making excessive gains, should also be well placed at the start of 2018. As such, overall economic growth is likely to remain firm enough to sustain an increasingly tight labour market. If so, underlying inflation should creep higher during the year.

Gross domestic product (GDP) is the broadest measure of aggregate economic activity and encompasses every sector of the economy. The first or flash estimate is normally released in the second week of the second month after the reference quarter. This is based on only limited data and provides just quarterly and annual growth rates and a limited qualitative guide to how the major output sectors performed.

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.