Microeconomic Indicator in FOREX:
GDP Growth Rate
Gross Domestic Product Growth Rate
What is the GDP growth rate?
The growth rate of the Gross Domestic Product of a nation fundamentally determines the speed at which the economy of that nation is growing. It is ideally expressed as a percentage which demonstrates the rate of change in the nation’s GDP from one period to another. Generally, this is accomplished by comparing one-quarter of the country’s Gross Domestic Product to that of its previous quarter. It is basically determined by some of the vital components of GDP. The single most critical driver of the country’s GDP growth is personal consumption. Almost 70% of the economic output is driven by personal consumption alone. It is nothing but the amount of money spent by the people in the country on goods and services.
The second main component that drives the growth rate of a country’s GDP is Business Investments. This includes the construction, infrastructure, and other inventory levels. Government’s expenditure on the country’s Social & Security activities, Defence, Medicare, etc. is also a significant driver of growth. During the recession time, the government tends to maximize its spending to push the economy of the country. Also, the total value of the exports and imports that are undertaken by the country plays a relevant role in determining the GDP growth rate of that country.
What does it measure?
GDP growth rate determines the nation’s economic health. If the GDP growth rate is positive, it implies that the economy is doing well, and the nation’s wealth is increasing. Likewise, if the GDP growth rate is negative, that is if the GDP falls from the previous period to the current, it indicates that the economic growth of the nation is declining. It means that there is something wrong in the economy. If the GDP growth rate is very minimal or negative, unemployment in the country rises, as the production has gone down. Hence, producers fire employees to reduce costs, thereby increasing unemployment.
Reliable sources of information on ‘GDP Growth Rate’ for Major currencies:
There is a lot of information concerning the GDP Growth Rate in the sources provided below. You can familiarise yourself with GDP Growth Rates of the respective country along with the historical data related to that country’s GDP. You can also compare the GDP growth rates of one country to the other using this web portal. The graphical representation of the historical GDP data will give you a clear understanding of how the country is performing over time. You also get to change the graphical representations according to your preference. A ton of more information related to the latest news in this regard is provided in the sources below, to give you a better understanding on what affected the growth or decline in the Country’s GDP, forecasts, etc.
What do traders care about the GDP growth rate and its impact on the currency?
The GDP growth rate is directly proportional to the value of that country’s currency. If the GDP growth rate is still or negative, there will be a strong impact on that Country’s currency, and it might get depreciated depending on the other factors as well. This impacts the trade that has been happening on that currency. The negative fluctuations on the currency may cause panic in the traders who are holding that currency, and if you are a trader who is holding the currency of a country whose GDP growth rate is negative, you should be cautious about it.
Frequency of the release
GDP of a country is generally calculated and released annually. Although, some counties publish their GDP every quarter. So the GDP growth rate is calculated either quarterly or annually or both as per the release dates of GDP by the respective countries.
The Bottom Line
Understanding the Gross Domestic Product and its growth or decline rate is essential for the investors and traders as it can have a direct impact on how the financial markets like Forex behave, either positively or negatively. A strong GDP growth rate renders high corporate earnings, which promises well for the country’s currency. Likewise, a decreasing GDP growth rate implies that the economic growth is weakening, which is a downside for earnings and hence the country’s currency as well. According to financial market experts, there might be an occurrence of the recession if a country’s GDP growth rate is negative for two consecutive quarters.
As a country’s Gross domestic product tracks the basic economic value of all the finished goods & services produced within that country’s borders in a specific time period, it can be used as a measure to determine that health of that country. If the GDP growth rate is solid, the interest rates tend to correlate positively. This is because higher interest rates attract foreign investors which results in the value raise of currency of that country. Conversely, if the GDP growth rate is negative, the country’s currency tends to fall. A drop in the value of a country’s currency can affect the trade deficit also.
A positive GDP growth rate would also cause central banks to raise the interest rate for stabilization. These high-interest rates then attract the inflow of foreign currency that seeks higher returns in the international market. This may cause the home currency to appreciate. Conversely, a robust and positive GDP growth rate would raise the imports of the country due to the income effect. This may cause the home currency to depreciate, as the country’s residents purchase foreign currency to purchase imported goods. However, the NET impact depends on which dominates the most. Generally the former dominates in typical cases, so we can say that the currency will appreciate when the GDP growth rate of the country is strong.