Two headlines about the same economy can look completely different depending on how growth is measured. One might say an economy grew 1 per cent, another that it grew 4 per cent, and both can be correct. The difference is usually whether the figure compares this quarter with the previous quarter or with the same quarter a year earlier. Knowing which is which is one of the simplest ways to avoid misreading economic data.
Quarter-on-quarter growth
Quarter-on-quarter growth, often written q/q, compares output in the latest three months with the three months before. It tells you about the most recent momentum. If an economy grew 1.0 per cent quarter on quarter, its output in that quarter was 1 per cent higher than in the previous one.
This is the measure the UK, the eurozone, Japan and South Korea usually put in their headlines. South Korea’s latest third-quarter figure of 1.0 per cent growth on the previous quarter, well ahead of forecasts, is a good example. It is a fast pace for a single quarter.
Year-on-year growth
Year-on-year growth, or y/y, compares the latest quarter with the same quarter a year earlier. Because it covers twelve months, it smooths out short-term swings and seasonal quirks. It is slower to react but gives a steadier picture of the trend.
Inflation figures are almost always quoted year on year, which is why you hear that prices are rising 3.5 per cent rather than a monthly figure.
The annualised rate in the US
The United States adds a third version. Its GDP headline is quarter-on-quarter growth expressed as an annualised rate, which asks what the annual growth would be if the latest quarter’s pace continued for a full year. Roughly speaking, a quarterly growth rate of 0.75 per cent becomes about 3 per cent annualised. That is why US growth headlines often look larger than European ones even when the underlying pace is similar. Our guide to the US GDP advance estimate explains how that first reading is put together.
Why the difference matters for traders
Markets react to surprises relative to forecasts, so the first job is making sure you are comparing like with like. A trader who sees a 1 per cent UK figure next to a 3 per cent US figure and concludes the US is growing three times faster may be comparing a quarterly rate with an annualised one.
The second point is turning points. Quarter-on-quarter figures show a slowdown or a pick-up first. Year-on-year figures can keep rising for a while after momentum has faded, because they still include strong quarters from earlier in the year. Economists call this a base effect, which our explainer on base effects in inflation data covers in more detail.
A simple checklist
When you read a growth or inflation headline, check three things. Is it quarter on quarter, year on year or annualised? Is it the first estimate, which may be revised? And what did economists expect? The market’s reaction depends far more on the gap between the number and the forecast than on the number itself.
For how this week’s growth figures are moving markets, this morning’s Morning Market Brief has the details. If you want to build better habits in reading data before you act on it, the free Samuel & Co Trading Trader Assessment is a sensible place to start.
