Gross Domestic Product – GDP

Gross Domestic Product – GDP

Gross Domestic Product is considered by most Forex Traders as the broadest and most comprehensive barometer of a country’s overall economic condition.

GDP is a measure of all domestic goods and services produced by an economy. It is generally reported on a quarterly basis but is also compared ‘year on year.’ The GDP number is useful in that it provides a snapshot of economic activity in a region.

A positive, rising GDP number is a sign that the economy is growing. This attracts Foreign investment which in turn raises both bond and stock markets. A natural consequence of this is to see a conversion of foreign currency into the domestic currency, thus helping raise its value.

It would not be uncommon to see interest rates increase as a follow-up to a rising GDP, as Central Banks will also have an increased confidence in the strength of their economy.

A lower but positive GDP value in relation to previous readings is a sign that economic growth is decelerating; a negative GDP figure is a sign that growth is declining.

Two consecutive quarters of negative growth are generally termed a recession by economists. A recession is characterised by a period of falling demand and economic activity. Generally during such periods interest rates will be lowered in an effort to help stimulate economic growth.

GDP releases and inflation statistics are some of the most important parameters that central banks use in determining their interest rate policies. The underlying economic growth reported in GDP figures can be the precursor to wage growth and price rises which in turn lead to inflation. Central banks may try to curtail these inflationary pressures by raising interest rates in an effort to slow down economic growth.

On the flip side however, low GDP growth figures may results in Central banks trying to‘kick start’ growth by lowering interest rates in an effort to stimulate economic expansion.

Like Inflation figures, GDP releases provide another way in which the Forex Trader can get advance warning of changes in Central Bank policies.

Remember that as with all economic releases, it is not simply the released numbers that dictate the direction of the market. Often it is what is implied by the accompanying minutes which can give an indication of future policy.

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