US economic growth slows to 1.6 per cent in first quarter

GDP report comes after economic data suggested a delay in interest-rate cuts

Traders work on the floor of the New York Stock Exchange. AFP
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The US economy slowed in the first quarter after a bumper 2023, showing signs that consumers are feeling the pressure of high interest rates.

GDP grew at a 1.6 per cent rate in the first quarter this year, down from 3.4 per cent in the last quarter of 2023, the Commerce Department reported on Thursday.

The Federal Reserve Bank of Atlanta's GDPNow also forecast growth of 2.7 per cent and for consumer spending to surge 3.3 per cent.

Consumer spending accounted for most of the economic growth from January to March but the report also showed consumers did not spend as much as in previous quarters. The weaker-than-expected findings also reflected decelerations in exports and government spending, the Commerce Department said.

Wells Fargo economists Tim Quinlan and Shannon Seery Grein said the GDP report indicates consumers are still spending but doing so in the services sector.

"After an unsettling headline miss, the picture that emerges from the details in today's GDP report is actually more of the same in terms of the factors that are standing in the way of a lower rate environment," they wrote in a note to investors.

Thursday's report comes after a number of reports indicated strong economic growth despite the Federal Reserve's interest rates.

The International Monetary Fund last week reported strong economic growth in the US carried much of the economic growth around the world last year.

The IMF also upgraded its forecast for the US economy this year. The multilateral lender expects US GDP to grow by 2.7 per cent this year, up from its 2.1 projection in January. That is well above growth projections for the UK, France, Japan and other advanced economies.

But IMF managing director Kristalina Georgieva warned such strong growth has a “flipside”.

“Disinflation is taking longer than expected,” she said during the Spring Meetings in Washington.

Ms Georgieva was referring to the Fed's long-term 2 per cent inflation target. While inflation has climbed down considerably since its peak in 2022, the Fed's preferred metric showed some stalled progress.

Her remarks came days after Federal Reserve Chairman Jerome Powell said recent inflation data would probably delay any interest-rate cuts the US central bank might make.

In previewing this week's Personal Consumption Expenditures Price Index, Mr Powell said March's report would be little changed from the month before. Core inflation rose 2.8 per cent in February.

Stalled inflation, strong economic growth and an unemployment rate below 4 per cent have given Mr Powell and his colleagues an opportunity to adjust their language in discussing interest rates.

After Mr Powell suggested the data indicated a delay in cutting interest rates, other Fed officials have since said they are in no rush to begin dialling back on the central bank's restrictive stance, a shift from their optimism last month.

Delays in the Fed's efforts to quell inflation will be felt in other countries, notably among GCC nations where currencies are pegged to the dollar.

Brazil's Finance Minister Fernando Haddad said G20 countries are beginning to adjust to the possibility of a delay in rate cuts. He criticised Fed officials for being inconsistent in their messaging and said the rest of the world depends on the US central bank.

The IMF last week warned central banks to push back against market optimism and remain neutral amid political pressure, when half the world will vote in an election this year.

The economy is expected to be one of the defining issues in the US election. Nearly two thirds of US adults disapprove of his handling of the economy, a Gallup poll found last month.

Treasury Secretary Janet Yellen told Reuters she expects inflation to fall in line with lower levels.

"The US economy continues to perform very, very well," she added.

Updated: April 26, 2024, 3:54 AM