US rate rise on horizon after growth slows less than feared
THE US economy grew by an annualised 1.2pc in the first quarter of the year, smashing expectations and indicating that its slowdown was less sharp than analysts feared.
Initial estimates indicated the world’s largest economy expanded by just 0.7pc – on an annualised basis – in the first three months of the year, but the revised numbers from the Commerce Department show GDP grew more quickly.
That still represents a substantial deceleration from the 2.1pc growth recorded in the final quarter of 2016 and 3.5pc in the three months before that.
Consumer spending and residential investment were both stronger than expected, while local government spending fell by less than initially estimated, all contributing to the improvement in the first quarter numbers. An unexpected rise in exports also helped to bolster the relatively weak growth figure.
However, this “doesn’t alter the fact that it was another disappointing start to the year,” said Paul Hollingsworth at Capital Economics.
“Nevertheless, the survey evidence remains unusually strong and the hard data have begun to improve too. We still expect second-quarter GDP growth to be between 2.5pc and 3.0pc annualised.” As a result, analysts expect the Federal Reserve will hike interest rates next month.
“As first-quarter GDP estimates in the US are often weak, the Fed have already dismissed this data, instead placing more emphasis on the labour market figures, which have strengthened in recent months,” said economist Ian Kernohan at Royal London Asset Management.
“Off the back of this strength, another hike in US interest rates next month now seems a certainty.”
Minutes of the Fed’s May released this week revealed that most members of the rate-setting committee backed a rise “soon”. The committee meets next on June 13-14, when the Fed chairman, Janet Yellen, will also hold a press conference.