DE: GDP Flash

Tue May 15 01:00:00 CDT 2018

Consensus Actual Previous
Quarter over Quarter 0.4% 0.3% 0.6%
Year over Year 2.4% 2.3% 2.9%

The economy provisionally expanded at a modest 0.3 percent quarterly rate at the start of the year. This was slightly below market expectations and only half the unrevised 0.6 percent rate posted at the end of 2017. It also equalled the worst performance since the first quarter of 2015. Calendar and seasonally adjusted annual growth was 2.3 percent, down from 2.9 percent in the fourth quarter, while the unadjusted yearly rate dropped 0.7 percentage points to 1.6 percent.

As ever with the flash report, there are no details of the GDP expenditure components available. However, the FSO did indicate that quarterly growth was buoyed by a positive contribution from investment, particularly in construction and investment. Household spending was only marginally higher while government consumption declined for the first time in almost five years. On the external side, both exports and imports contracted.

Confirmation of a sharp deceleration in German economic activity last quarter is clearly bad news for the ECB. Indeed, the German results make for some downside risk to the revised Eurozone report due later this morning. Bad weather was probably a factor, although the apparent buoyancy of construction suggests that the effects were relatively limited, but there has clearly been an underlying slowdown. Moreover, the April PMIs pointed to a further, albeit limited, cooling at the start of the current quarter. If accurate, May and June will need to see a decent rebound or the ECB may be forced to extend its asset purchase programme beyond September.

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.