Fri May 25 03:30:00 CDT 2018

Consensus Actual Previous
Quarter over Quarter 0.1% 0.1% 0.1%
Year over Year 1.2% 1.2% 1.2%

Quarterly economic growth was unrevised at the start of the year. A meagre 0.1 percent increase in total output was well short of the 0.4 percent gain recorded at the end of 2017 and the weakest performance since the fourth quarter of 2012. The annual rate of expansion was 1.2 percent, also matching its provisional outturn and down from 1.4 percent in the fourth quarter.

The first look at the GDP expenditure components showed that the quarterly deceleration was largely due to a smaller increase in household spending (0.2 percent after 0.3 percent) and sharply weaker business investment (minus 0.2 percent after 0.3 percent). This was the smallest rise in the former since the fourth quarter of 2014 and the first contraction in the latter since the end of 2016. Overall gross capital formation subtracted 0.2 percentage points as inventory accumulation had a significant negative impact. Elsewhere, growth of government consumption was a tick firmer (0.5 percent after 0.4 percent).

Meantime, a 0.6 percent quarterly fall in imports combined with a 0.5 percent drop in exports led to a small improvement in the real trade balance. However, it was not large enough to provide any meaningful boost to GDP growth. This followed a 0.4 percentage point hit in the fourth quarter and means that net trade flows remain disappointing given the relative weakness of the pound.

There are not too many surprises in today's data. Confirmation of a sharp deceleration in private sector domestic demand will help to convince the BoE MPC's doves that it is too early to tighten policy. Softer economy-wide inflation the annual change in the GDP deflator dipped 0.2 percentage points to 1.4 percent similarly offers little ammunition for the hawks. Bad weather had some effect on output notably in construction which contracted more than 2 percent - but the ONS described its overall impact as limited. There is nothing here to suggest that Bank Rate might be hiked before August at the earliest, and quite possibly not then either.

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.)