Why GDP Growth Matters

Susan Jung |

European GDP growth forecasts reduced

Concerns continue to plague market sentiment and yet again another growth forecast is reduced. The European monetary agency and the European Central Bank (ECB) cut forecasts warning of a significantly reduced economic expansion. 

In a recent CNBC article, the condition was described as indicative of a fall in sentiment related to economic expansion. 

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ECB President Mario Draghi said Thursday that there had been a "sizable moderation in economic expansion that will extend into the current year."

"The persistence of uncertainties related to geopolitical factors, the threat of protectionism and vulnerabilities in emerging markets appears to be leaving marks on economic sentiment," Draghi told reporters. 

Source: March 7, 2019 CNBC.com article by Silvia Amaro
https://www.cnbc.com/2019/03/07/ecbs-draghi-slashes-growth-forecasts.html 

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Why does GDP growth matter?

Reduced GDP generally leads to reduced corporate profits. Reduced corporate profits mean the future value of a company’s equity shares need to be reassessed based on new earnings expectations. When earnings expectations are lower, that can affect share prices and stocks.

On the fixed income side, reduced economic growth tends to be positive for bond prices as expectations for interest rate increases begin to moderate. The US Federal Reserve has already stated that growth will likely be moderate, and this tends to be supportive of bond prices. Said another way, if the Federal Reserve does not raise rates, bond prices can benefit from this path as expectations for interest rate increases are reduced.

Hanging over the entire reduced GDP discussion is the implicit warning that slowing economic growth might lead to an economic recession. A recession is a reduction over sequential quarters of economic activity. You can find out a more detailed definition here. 

https://en.m.wikipedia.org/wiki/Recession 

We believe the odds of a recession in the United State are lower than 50% at this point in time. But slowing economic growth is concerning as economies throughout the world face economic headwinds in 2019. It’s our best-case scenario that economic growth will likely be less than people expect for the foreseeable future, and we are investing portfolios with this perspective in mind.

We watch economic data closely for signs of trouble in economic growth trends. At present, economies are slowing not shrinking but it is important to stay diligent and monitor conditions. The entire research team at Destination Wealth Management is doing just that. Our investment strategies take into account our economic outlook.

If you have any questions about this information, don’t hesitate to let us know. Happy to help!

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