US economic growth slowed sharply in the first quarter of 2023 despite strong consumer spending, as the Federal Reserve continued its historic tightening campaign.
THE the largest economy in the world rose 1.1% on an annualized basis between January and March, according to preliminary data released Thursday by the Commerce Department.
The figures marked a sharp deceleration from the 2.6% pace recorded in the last three months of 2022 and are well below economists’ expectations of a 2% increase.
Other countries have so far beat expectations in the first quarter, with China growing at an annual rate of 4.5%, driven by a rebound in consumer spending after Beijing ended the zero-Covid policy.
Eurozone figures for January to March will be released on Friday and are expected to show annual growth of 1.4%. On Thursday, Belgium’s and Sweden’s gross domestic product figures beat expectations.
The US slowdown suggests that the Fed’s year-long battle against runaway inflation is starting to pay off. Since March of last year, the US central bank has raised its key rate from near zero to just under 5%, the fastest increase in decades.
The officials are together to deliver another quarter-point rate hike next week, which would take the fed funds rate to a new target range of 5% to 5.25%. They are then expected to consider a pause in their tightening campaign.
Other major Western economies are still struggling with soaring prices. Earlier this month, official data in the UK showed inflation fell less than expected in March, remaining stubbornly in double digits.
US government bonds sold off after the release of US GDP data, pushing the two-year Treasury yield – which closely tracks interest rate expectations – up 0.16 points. percentage at 4.01%. The benchmark 10-year yield rose 0.1 percentage point to 3.53%.
Despite the slowing US economy, Thursday’s data showed it continued to show pockets of strength. Strong consumer growth offset slower inventory declines and slower housing and business investment.
“Really peeling back the layers is very positive in terms of consumer spending,” said Kristina Hooper, chief global market strategist at Invesco. But she added, “Seeing a significant amount of consumer spending may raise concerns that it will fuel more Fed rate hikes.”
Inflation-adjusted consumer spending grew at an annual rate of 3.7%, compared to 1% in the last quarter of 2022.
“On the face of it, this looks like a pretty robust GDP report despite the low number,” said Aditya Bhave, senior US economist at Bank of America. “The worry is that a lot of the force was pulled by what happened in January. The move into the second quarter doesn’t look particularly encouraging.
Fed Chairman Jay Powell said the credit crunch resulting from the collapse of Silicon Valley Bank earlier this year could have a similar effect to rate tightening on the economy.
Some officials say a pause in the U.S. central bank’s inflation-fighting campaign in June would allow policymakers to assess this issue, as well as gauge the effect of their actions over the past year. Others say they are not ruling out further rate hikes if the data warrants it.
What kept officials on their toes was the surprising resilience of the US consumer, buoyed by a tight labor market. But early signs of slowing monthly job gains and wage growth provided reassurance that the worst of the inflationary shock is over.
Officials maintain that getting inflation back to the Fed’s long-standing 2% target will require a period of “below-trend growth and some easing in labor market conditions,” but they held off. predict a recession.
In March, most officials expect inflation-adjusted GDP growth to slow to 0.4% in 2023, before rebounding to 1.2% the following year. The unemployment rate, meanwhile, is expected to peak at 4.6% in 2024, according to most officials, from its current level of 3.5%.
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