Gross Domestic Product is another of the principle economic indicators traders and investors use to assess the likely future exchange rate from pounds to dollars, with strong growth signaling an increase in economic activity, and therefore a high demand for the currency. Economic expansion however also raises concerns about inflationary pressure, which generally prompts the central banks to raise interest rates. This means that positive GDP readings are generally bullish for a given currency, while negative readings are usually bearish.

Gross Domestic Product, is the most commonly used indicator of national income, as it attempts to measure the total of income received from all the various sectors of the economy, such as manufacturing, agriculture, and the services sectors by both domestic and foreign companies. The data is published every three months, and in simple terms it describes how much money was made in the economy in a certain period of time. The reason the indicator is called ‘Gross’, is because no allowance is made for any depreciation in plant and machinery which will gradually decrease in value and output, and eventually will need to be replaced. Now a closely related indicator, is Gross National Product,  which the US used up until 1992 as its key measure. GNP includes net foreign income in the figures – in other words what companies earn abroad, less what foreign companies earn in the country and then send back to their own countries. The US figure is still regarded by many analysts as more reliable since it represents the sum of all goods and services produced by US residents, both in the US and abroad. In other words, GDP focuses on the region where income is generated and disregards the nationality of the company, whereas GNP focuses on the nationality of the producer, regardless of where they are based.

The UK GDP figures are issued quarterly by the Office For National Statistics on a monthly basis, at 8.30 GMT, and the headline figure for UK GDP is an annualized percentage growth rate. The data is generally released around 4 weeks after the end of the quarter to which they relate. Despite the fact that the information is relatively old by the time it appears, and that much of the information is released in other areas, the release can still move the markets significantly. The forecast for UK GDP growth by the end of 2008 is for a an annualised growth rate of between 1% and 1.3%. This is marginally below the original expectation of growth of 1.5%. which would have suggested that despite much bad news on the economic front, the UK was set to avoid a major recession. As we now know to our cost this is not the case, having now officially enetered recession in the last few days, so it does beg the question as the use or validity of many of these economic indicators.In the US the key GDP number to look for is around 0.8% in 2008 possibly rising to 1.3% in 2009 assuming the economy does not enter a period of prolonged recession as many economists are now forecasting, and indeed is now happening on a global front. Growth below these figures would indicate a significant downturn with increased unemployment and lower spending which may ultimately lead to a crash, not seen since the Great Depression of 1929.

Due to the tardiness of this report and because data on GDP components are available beforehand, the actual GDP figure is usually well anticipated. But given its overall significance GDP has the tendency to move the market upon release, acting to either confirm or upset economic expectations. Robust GDP growth signals a heightened level of activity that is generally associated with a healthy economy. However economic expansion also raises concerns about inflationary pressures which may lead to monetary policy tightening. It is also important to realise that as a trader or investor, not only are the figures themselves important, but also how the data aligns with the economic forecasts which set the benchmark by which the figures are judged. In addition we also need to consider the data over previous periods. For example one set of GDP data significantly above or below market expectations may be a ‘blip’, two consecutive periods may be the start of a trend, and therefore carry more weight in the market. Remember also that everything is comparative – whilst positive GDP data is generally bullish for the currency, a booming economy may indicate that inflationary pressure could enter the economy, with a subsequent need for a tightening in monetary policy – who said trading or investing was easy!!