EMU: GDP Flash

Tue May 15 04:00:00 CDT 2018

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

Quarterly economic growth was unrevised at the start of the year. A 0.4 percent increase in total output matched the preliminary flash outturn although earlier revisions saw the annual expansion rate nudged a tick firmer to 3.0 percent.

Today's flash report still offers no details on the GDP expenditure components but it does provide some insight into individual member performances. To this end, amongst the four larger states, quarterly growth slowed from 0.7 percent to just 0.3 percent in France and from 0.6 percent to also 0.3 percent in Germany. Italy was unchanged at 0.3 percent while Spain saw its third successive 0.7 percent print. Elsewhere, Latvia (1.7 percent) enjoyed a particularly strong period as did Finland (1.1 percent). Slovakia (0.9 percent) and Cyprus (0.8 percent) similarly easily beat the eurozone average. All reporting countries registered an increase in GDP.

There is limited fresh news in this report but, apart from Spain, it does highlight the relative weakness of the more populous members. This will need to change if aggregate growth is to accelerate significantly this quarter.

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.