In Search of GDP Growth Forecasts
Interest in the calculation and comparison of GDP figures is not limited to the realm of professional investing. It’s an indispensable tool for the political and economic elite as well. Although GDP measures the combined market value of all final goods and services produced in a region, the sum total is always of less interest than the changes therein. The most common use of GDP is expressing its change in percentage compared to the previous time period.The direction and extend of that change tends to be at the center of analysis.
There are many institutions that prepare GDP forecasts ranging from one to three years, however, the ones with the final say are the official national statistical services. The figures in their reports are always the ones quoted as fact. While the markets seem more interested in forecasts than facts, governmental bodies and especially central banks put a great deal of stock in these reports when modeling their own expectations. These expectations form the basis of fiscal policy and government budget. The government does create its own projections that include potential changes to taxation and government spending, both of which directly affect GDP. Compared to governments, central bank projections are typically less politically motivated so it’s worth taking a close look at how and why the two differ when they do. In addition there are also international organizations who may have less insight into the economic policy of individual countries, but in return have a global perspective on the flow of goods and capital. Those two factors have at least as much of an effect on GDP as government policy and often and even more pronounced one.
The assorted methods and organizations outlined above showcases just how diverse the application of GDP is. Depending on what assets or companies a given investor has a stake in, they may find some of these projections more significant than others.
In the currency and foreign exchange markets, central banks are definitely the focus of traders’ attention. These banks determine the base interest rates for individual currencies, directly affecting their relative value compared to other currencies. In theory they’re independent from state governments, however, in reality they’re often faced with increasing political pressure. Presidents in the past have often tried to influence the Fed. President Trump for example has repeatedly expressed his disapproval for their repeated interest rate hikes. The constant strengthening of the US dollar combined with the rising corporate and retail interest rates cuts against the President’s economic policy goals. It’s also worth noting that the Fed’s projections for economic growth have turned out to be less than accurate, in part due to the global economic effects of the unexpected tariff raises. Now that GDP growth has slowed down they now have less reason to keep raising the base rate. Furthermore the Fed may have to consider instead slowly turning to programs that increase liquidity. Even though the Fed is somewhat unique when compared to most central banks, it still serves the same core purpose of keeping the country’s currency stable, rather than trying to aid any current administration’s economic policy.
Publicly traded companies on the stock market typically contribute a significant portion of GDP so it’s no surprise when even the slightest mention of slower GDP growth is enough to make stock traders nervous. The result of the 2018 Q4 flash reports was that companies lowered their revenue forecasts for 2019 by 1% compared to the previous year. This doesn’t necessarily mean that the country’s GDP would decline by 1% as well, however, it does strongly indicate the likely real direction it’ll go. The more closed an economy, the larger the effects government policy has on the performance of the companies operating there. Based on this logic it’s safe to say that government GDP projections should be the primary focus for those looking at the stock market. When the government expects a notable increase it’s typically a powerful indicator that suggests stock prices will rise, while downwards projections can easily signal the opposite. The European Union is a good example of that. The European Commission expected GDP to rise in 1.9% in November of 2018. They lowered their expectations to 1.2% in February of 2019, resulting in European stock indices dropping immediately and closing at a 3% minus the day of the announcement. The price of the Euro on the other hand remained largely unaffected by the announcement.
When it comes to deciding which institution’s stats to believe there’s no single answer that fits all sizes. It’s not a matter of credibility as much as a matter of where each market participant’s interests lie.