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GDP Number Will Initially Be Wrong and Will Be Revised Many Times

GDP Number Will Initially Be Wrong and Will Be Revised Many Times
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Friday, 27 July 2018 08:16 AM Current | Bio | Archive

US second quarter GDP

US GDP is due for release today. This is the ‘advanced’ reading for the second quarter.

Now, whatever the number is, it will be wrong and it will be revised multiple times by quite a lot over the course of the coming months and years. Nonetheless, the markets will react to today’s data because it is shiny new information and traders like shiny new things. Accuracy is of little importance.

Economists are not seduced by shiny new things. An economist will always look at the best quality data available. Today’s number that captures maybe 40 percent of what it is supposed to capture, and that’s a generous estimate, is not the best quality of data available.

Nonetheless, the data will show economic strength, or it should do. There is economic strength in the United States. The tax cuts started to impact the economy in the second quarter and the weird distortions of the first quarter that never seem to have been resolved will fade away.

President Trump, speaking at a steel mill in Granite City, Illinois, on Thursday, said that he doubted the expansion would reach the 5.3 percent some economists have penciled in, but said that “if it has a four in front of it, we’re happy.” He called recent economic figures “unthinkable.”

The expectation of the markets is for a GDP growth number of over 4 percent annual growth, which would be the best growth number since Obama’s boom year of 2014.

The number will be restrained by the government’s policy of enlarging the US current account deficit because over a third of the tax cuts are expected to be spent on imports. Imports do not contribute to US GDP growth and there is a limiting factor within the growth data therefore.

Analysts aren’t convinced the acceleration will last, predicting solid yet less spectacular growth in the second half of the year as the tax stimulus begins to fade, the Federal Reserve raises borrowing costs again and the economic expansion ages.

The simmering trade war with China will also weigh on the economy.

France GDP

A flash estimate showed that French GDP grew by 0.2 percent during the second quarter of 2018, the same pace as in the previous period and slightly below market consensus of a 0.3 percent growth rate increase.

The pace of expansion remained at the weakest level since the third quarter of 2016 mainly due to a drop in consumer spending amid a series of railway strikes and a string of national holidays. Year-on-year, the economy expanded by 1.7 percent in the second quarter, down from 2.2 percent in the first quarter. 

One could say that part of the problem in analyzing the French data at the moment is the recent inclination of French workers to stop working and go on strike. People on strike are not making stuff and GDP is all about making stuff.

Brexit

Meanwhile, the interminably tedious process of cutting the European Union (EU) off from the United Kingdom (UK) is becoming a little bit more fraught. The European Union’s negotiator Mr. Barnier has rejected the UK’s proposed solution to the customs union.
There are 3 options:

  1. This leads eventually to a very disorderly divorce,
  2. This leads to the UK staying in some kind of customs union,
  3. The European Union (EU) heads of governments reverse Mr. Barnier’s position when it actually comes to a decision.

The risks of a disorderly divorce have probably risen as the ability of the UK government making further concessions is now very limited.

Emerging Markets – Turkey

President Trump has threatened “large sanctions” against Turkey. Trump’s warning followed criticisms of Turkey by Vice President Mike Pence and Secretary of State Mike Pompeo and caused the Turkish lira to extend losses in late trading on Thursday. The U.S. diplomatic offensive was aimed at securing the release of Andrew Brunson, an evangelical minister detained on charges of involvement in a failed 2016 coup in Turkey.

The Turkish lira, which is this year’s worst performer versus the dollar after the Argentine peso, has weakened about 22 percent so far.

Inflation continues to defy President Erdogan’s economic theories that aim at keeping borrowing costs as low as possible with low interest rates. June inflation was 15.39 percent year-over-year, which was up from 12.15 percent in May.

For investors it’s important to keep in mind that this is a very specific set of problems to Turkey rather than evidence of a more systemic problem for emerging markets (EM).   

Etienne "Hans" Parisis is a bank economist who has advised investors on financial markets and international investments.
 

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Now, whatever the number is, it will be wrong and it will be revised multiple times by quite a lot over the course of the coming months and years. Nonetheless, the markets will react to today’s data because it is shiny new information and traders like shiny new things.
gdp, economy, investors, emerging, markets
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2018-16-27
Friday, 27 July 2018 08:16 AM
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