The US economy slowed far more than expected in the first quarter of the year as its gross domestic product (GDP) endured the influence of stubborn inflation and high interest rates.
According to new ‘flash’ figures published on Thursday, the US’ GDP grew at an annualised rate of 1.6 per cent between January and March. Economists had expected a reading of 2.5 per cent.
The Bureau of Economic Analysis said consumer spending and housing investment all contributed to growth, which was partly offset by a decrease in inventory investment.
In a sign that the Federal Reserve could delay interest rate cuts, the core personal consumption expenditures index, a closely-watched inflation metric, rose more than expected at 3.7 per cent.
The US economy has exceeded expectations over the past two years, growing at a healthy pace despite the impact of the Fed’s interest rate hikes.
In the final quarter of last year, the world’s largest economy grew at an annualised rate of 3.3 per cent, bringing its expansion across the year as a whole to 2.5 per cent. This was a faster rate than the 1.9 per cent recorded in 2022.
The International Monetary Fund (IMF) expects the US economy to continue its strong run, forecasting a 2.7 per cent expansion this year. Its latest batch of forecasts, released earlier this month, were a 0.6 per cent upgrade on its January round.
European economies, in contrast, have struggled to generate momentum after the pandemic.
Economists point to the massive stimulus package launched during the pandemic as a key factor explaining its strength. The US also has a more flexible jobs market and a relatively independent energy supply, meaning it was much less affected by the fallout from the Russian invasion of Ukraine.
However, the continued strength of the US economy has contributed to stubborn price pressures. Inflation has come in above expectations for three consecutive months, currently standing at 3.5 per cent.
Core inflation – which strips out volatile components such as food and energy – remained stuck at 3.8 per cent in March, after a third consecutive 0.4 per increase on the previous month.
A strong economy and fears about persistent inflation have pushed back the timing of the first interest rate cut. Markets now think the Fed will start cutting interest rates in September, later than both the European Central Bank and the Bank of England.
Policymakers are under a communications blackout ahead of their next meeting, which is due to conclude on 1 May. They are almost certain to hold interest rates at a 23-year high of between 5.25 and 5.50 per cent.