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Unquestionably, Gross Domestic Product (GDP) data are one of the most significant economic indicators, watched and assessed by policymakers, economists, and traders worldwide. The objective of any GDP report is to accurately assess economic activity for goods and services over a given period. In other words, GDP measures economic growth, specifically focussing on how much is produced, earned, and spent by the end user within a country’s borders over, say, a quarter or a year.
For this post, the UK GDP report is in the spotlight.
The GDP growth rate is widely used to measure an economy’s health and size, aiding analysis and comparisons of different economies over various time periods. The strength of a country’s economy can influence factors like income and tax revenue.
A positive (or rising) GDP reveals that UK economic activity is growing; conversely, a negative (or falling) GDP shows that the economy is possibly in a recession or slowing down. Consequently, if GDP is higher than the prior month, the economy has grown; conversely, a lower-than-previous figure indicates that the economy is shrinking.
In the UK, the Office for National Statistics (ONS) produces a monthly estimate of GDP growth that feeds into the quarterly estimate.
Three monthly estimates are released approximately 40 days after the month ends (for example, in June, the report will be for April, and in July, it will be for May, and so on). This approach provides timely insights into economic trends that, as noted above, contribute to the quarterly data. Nevertheless, as monthly figures can be volatile, revisions are common as more data/information becomes available.
Following the end of the quarter (approximately 40 days after the quarter ends), monthly estimates are used to produce and publish the preliminary quarterly GDP estimate (per the ONS, approximately 80% of data are available at this point). Quarterly data are then subsequently revised to produce the final quarterly release. Finally, annual GDP data are formally released (using quarterly data) in two publications: the First Blue Book and the Second Blue Book. However, traders largely focus on monthly and quarterly numbers.
It is important to note that the monthly GDP estimates are calculated using the output approach. In contrast, quarterly estimates represent an average of the ONS's three approaches – output, income, and expenditure – which are discussed below. Therefore, the final quarterly GDP figure may differ slightly from the initial estimates based on monthly data.
GDP is also usually displayed in ‘real’ terms, meaning that rather than measuring GDP using the current year's prices (‘current GDP’), it is measured using the prices of a selected base/reference year (‘constant GDP’). Remember, GDP can rise for two reasons: a price rise (inflation) or a rise in economic activity. So, economists use real GDP to help distinguish between a price rise and productivity growth.
UK GDP is measured in three ways: the output approach, the income approach and the expenditure approach. Theoretically, the three calculations should produce similar results. Still, minor differences are often evident due to data discrepancies (different sources). According to the ONS, sources used to form the GDP value vary from data and surveys provided by the government and thousands of private organisations.
The ONS refers to the output approach as the Gross Value-Added approach (GVA), which, minus the value of intermediate inputs used in the production process, reveals the total monetary value of all ‘final’ goods and services produced within an economy over a given period. This approach does not consider intermediate goods and services as this would be ‘double counting’ and create an inaccurate GDP value.
To help explain, imagine Good A is a raw material sold to a manufacturer for £12 (the value added at this stage, therefore, is £12). This is the first step in the supply chain. Good A is subsequently manufactured into an intermediate product and sold for £15. At this stage in this basic (and short) supply chain, the output price is the price that Good A is sold for (£15), and the input price is the price for which the raw material was bought (£12). The difference between output and input price is the ‘value added’: £3. Following this, Good A is then sold to a retailer for £20 (value added: £5) and then finally sold to the end user for £25 (value added: £5). If you sum the value added from the beginning of the supply chain, it will total £25, the final price for Good A.
Of course, in reality, the calculations used by the ONS are more complex.
This approach sums all income generated by production activity. This includes wages, profits, interest payments, and net foreign income. According to the ONS, data are collected from various sources, such as Average Weekly Earnings, Quarterly Operating Profits Survey, and more.
This essentially is the total spending on goods and services within the UK economy over a specified period. This involves summing aspects of expenditure, such as consumer and government spending, as well as exports minus imports.
A steadily rising GDP value is generally considered good for the UK economy; growing output means more consumption, lower unemployment and increased tax revenue. A rising GDP value can also increase demand for UK assets, such as stocks that underpin the British pound (GBP). However, an overheated economy can trigger inflation; this may lead to the Bank of England (BoE) raising interest rates to combat inflation, which can weigh on stocks and bolster the GBP.
Falling GDP can mean an opposite scenario: a shrinking economy, less consumption, fewer jobs, and potentially a recession. Two consecutive quarters of negative GDP are considered a ‘technical recession’.
As a trader, it is vital to understand that preliminary GDP measures (those first out the gate) tend to garner the most attention. Equally important, though, while you can trade the GBP long (buy) on the back of better-than-expected data and trade short (sell) on softer-than-anticipated data, it is vital to consider the overall picture of the UK economy. In other words, it is prudent to understand the BoE’s position (whether its focus is on growth, for example) and research and understand the context of the economic landscape before entering a trade to ensure you are trading the highest probability opportunities.
1. What is UK GDP data?
GDP is a widely followed macroeconomic statistic showing the UK economy's health and size. In short, it provides an assessment of how much is produced, earned, and spent within the borders of the UK over a given time period.
2. How is the UK GDP calculated?
The ONS uses three approaches to calculate UK GDP: output, income, and expenditure.
3. Why is GDP data important for traders?
Together with inflation and unemployment data, GDP is among the most important statistics for traders. Depending on the stance of the central bank and the overall economic picture for the UK, GDP data can trigger large price movements across the financial markets.
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