Gross domestic product (GDP) represents the value of all goods and services produced in the economy over a given period. The latest data point – released quarterly – is usually a growth rate, quoted as an increase or decrease from the previous quarter (QoQ), or from the previous year (YoY). It is quoted in nominal terms and real (inflation-adjusted) terms.
Ultimately the GDP growth rate is the single most important economic statistic released in each quarter. It doesn’t necessarily measure growth in living standards, but it is a convenient proxy for it.
The GDP data release is a somewhat delayed or lagging indicator, because lots of data is released in between GDP datapoints which market participants use to form their expectations about the health of the economy. However, the ‘actual’ GDP growth rate might differ from that collectively expected by market participants, so it may contain some surprises, especially at more granular levels, i.e. the composition of GDP. The GDP release can therefore still have a significant impact on financial markets – a stronger than expected growth rate will typically be negative for bonds and positive for stocks and the domestic currency, and vice vera.
However, as with many other activity indicators, it is important to look out for signs of inflationary pressures and overheating of the economy, suggesting that the central bank might intervene to raise interest rates and trigger a recession.
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