The US economy probably slowed to a review during the first three months of the year, dampened by a record high trade deficit in the US and lower inventory growth after a very strong close at the end of 2021.
The Bureau of Economic Analysis is expected to publish its preliminary estimate for the first quarter’s gross domestic product, the broadest target for goods and services produced in the country, at 8:30 ET on Thursday. The data are expected to show that GDP declined to 1[ads1].0% on an annual basis, a sharp fall from 5.7% recorded in 2021.
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Some estimates are even gloomier. GDP nowan updated tracker monitored by the Federal Reserve Bank of Atlanta, estimates first-quarter growth of just 0.4%.
Although economic growth is almost certainly slowing as the initial pandemic recovery returns – and trillions of dollars in government stimulus – fade, a weak first-quarter GDP figure does not necessarily mean that the economy will falter.
This is because GDP can sometimes be misleading. First, the headline figure often hides the whole picture because the Ministry of Trade calculates GDP on a quarter-on-quarter basis as if this level of growth had been maintained for an entire year. In times of large up or down fluctuations, it can exaggerate both the decline in growth and the subsequent recoil.
The large decline this quarter also comes from an increase in the US trade deficit, lower government spending and a decline in inventories. The growing trade deficit comes from a combination of import growth and declining exports due to declining demand in the rest of the world.
Despite this, the basis for the economy – consumer spending and corporate investment – probably remained fairly robust in the first quarter. The figure is “driven by solid consumption spending and corporate investment, but a move that comes from net exports and lower inventory growth after a very strong upturn in 4Q,” according to Wilmington Trust chief economist Luke Tilley.
Nevertheless, a growing number of Wall Street firms predict an economic downturn over the next two years as a result of the Russian war in Ukraine, soaring inflation and an increasingly hawkish Federal Reserve. With the consumer price index at a height of 40 years, the US Federal Reserve is moving fast to raise interest rates in an attempt to cool demand.
The Fed’s policy makers raised the reference rate for federal funds by 25 basis points in March and have since telegraphed that steeper 50-point rate hikes are “on the table” at upcoming meetings, which begin in May.
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The new challenges have led economists to lower their expectations for the year. The International Monetary Fund said in its latest World Economic Outlook that its gross domestic product will grow by 3.6% this year, down 0.8 percentage points from its estimate in January.
“Global economic prospects have been severely set back, mainly due to Russia’s invasion of Ukraine,” wrote Pierre-Olivier Gourinchas, the IMF’s chief economist, in a blog post accompanying the report. “This crisis is unfolding even though the global economy has not yet fully recovered from the pandemic.”