EMU: GDP Flash

Wed May 02 04:00:00 CDT 2018

Consensus Actual Previous
Quarter over Quarter 0.4% 0.4% 0.6%
Year over Year 2.5% 2.5% 2.7%

The preliminary flash estimate of real GDP confirmed a significant slowdown in the rate of Eurozone economic growth at the start of the year. At 0.4 percent, the quarterly rise in total output was in line with market expectations but little more than half the upwardly revised 0.7 percent rate posted in the fourth quarter and amongst the smallest in the last four years. It was also the first deceleration in quarterly growth since the second quarter of 2016. The annual rate of expansion eased from 2.8 percent to 2.5 percent.

There are no details of the GDP expenditure components or even a geographical breakdown in today's report. However, national statistics already released suggest that domestic demand was relatively soft and net exports probably made a smaller contribution too.

These results may not come as much of a surprise to the ECB but they make the second quarter all the more important to the monetary policy outlook. Special factors such as bad weather and strikes probably biased down first quarter growth to some extent but there was almost certainly an underlying slowdown. Without some rebound this period, an extension of the central bank's asset purchase programme (APP) beyond its September soft end-date may prove unavoidable.

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.