MARKET ANALYSIS
TRADE AND PRODUCTION
Trade Balance is the difference between a country’s imports and its exports and is the largest component of a country’s balance of payments. Production is normally indicated by the Gross Domestic Product (GDP) figure.
This is the monetary value of all the finished goods and services produced within a country’s borders during a given time period. There is a strong relationship between a country’s production and its balance of payments.
Production is inclusive of all private and public consumption, government spending, investments and the differential between exports and imports. If this differential is negative, import levels exceed exports, then a country is said to hold a trade deficit. If the opposite occurs then a surplus is observed.
During a recession a country will endeavour to export more (a surplus) thus creating more jobs whilst in a period of expansion countries like to import more to limit inflation and provide greater price competition. The balance of trade is one of the less understood indicators of economies as it is perceived that a trade deficit is a bad indicator of its position.
Gross Domestic Product is seen as the leading indicator of the economic health of a country and is reported on a quarterly basis measuring the annualised change in the value of all the goods and services produced by the country in question. Two consecutive quarters of negative growth (economy contraction) are defined as a recession. Significant production figures are released from the US, UK, Eurozone and China.
GDP
Country
Type
Trade and Production
Announced
Quarterly
Description
Gross Domestic Product (GDP) is arguably the most important macroeconomic figure. It is a comprehensive measure of a country’s production during the period and is often closely watched by anyone participating in financial spread betting.
The figure consists of the purchases of domestically-produced goods and services by individuals, businesses, government bodies and foreigners. This all-inclusive measure of economic activity is important to equity investors or those interested in spread betting shares, because healthy growth often signifies strong corporate earnings.
In the US although it is q/q data it is reported it is in an annualised format. There are three versions; advanced, preliminary and final with the advanced data having the greatest impact. These are released a month apart on a cycle.
In the UK a similar pattern is followed with once again three figures reported. Those are the preliminary, revised and final which are all released a month apart. The preliminary, being the earliest, tends to have the biggest effect.
In China data comes from NBS and the People’s Bank of China, but there are no breakdowns of government consumption expenditure, gross fixed capital formation, change in inventories or net exports.
There are other areas aside from GDP figure to be aware of. The GDP deflator acts as an indicator of how much a change in the base year’s GDP relies upon changes in the price level. The deflator is a result of the nominal GDP divisible by the real GDP multiplied by 100.
As an example, presume that the price of a new television remains the same but television technology doubles then this would result in a price deflator of 50.
Another area to be aware of is population growth. If GDP doubles in a five year period but so does the population then the country is producing the same. In this instance the best measure to use is GDP per Capita as it compensates for population growth.
TRADE BALANCE
Country
Type
Trade and production
Frequency
Monthly
Description
The two main trade balances are reported from the US and China, they differ greatly in the manner they are reported and the effect they have on the global currency markets, which financial spread betters may be looking to trade.
The report for the US goes into further detail than other countries by differentiating between merchandise and services. It is by no means bilateral, as it considers the change in the US deficit against a number of trading partners.
The primary impact of the report is often on currency markets. A small trade deficit often results in bullish dollar moves. Particularly strong exports also represent healthy corporate growth, but stock gains have often been priced in by the time of this report. The report is compiled and delivered by the US department of Commerce.
The Chinese Trade Balance is compiled and delivered by the Customs General Administration, although it is often leaked ahead of time. It only covers the customs territory of mainland China, omitting goods from Hong Kong, Macao and Taiwan.
For the past decade China has seen significant growth in its economy resulting from high levels of exports to more developed countries in the west. However, since the yuan renminbi is pegged to a basket of currencies, this report does not impact exchange rates.
