US economy unexpectedly shrinks in sign of coming global growth cool down

A sharp pullback in businesses spending to build up stock to avoid being spiked by intense supply chain disruption has led the US economy to unexpectedly shrink in a sign that global growth will cool this year.

Stateside output dropped 1.4 per cent in the first three months of the year, a huge miss from Wall Street’s expectations of a one per cent expansion, official figures released today revealed.

It is the first time the US economy has contracted since the onset of the Covid-19 crisis.

Last quarter, firms scrambled to get their hands on inventories to ensure they could meet a resurgence in demand and bypass shortages of goods caused by global trade flows being gummed up.

A slowdown in US growth is usually a sign of things to come for other countries due to their heavy reliance on exporting goods and services to America.

UK economic growth is projected to be much worse than initially thought at the start of the year due to households slashing spending in response to wages falling to keep pace with an annual inflation rate of over seven per cent.

The International Monetary Fund has cut UK growth projections for this year one percentage point and thinks Britain will notch the weakest growth and highest inflation rate in the G7 next year.

Experts said the US GDP print was just noise and stressed the figures have been distorted by a front-loading of expenditure to restore depleted inventories last quarter.

“The economy is not falling into recession. Net trade has been hammered by a surge in imports, especially of consumer goods, as wholesalers and retailers have sought to rebuild inventory,” Ian Shepherdson, chief economist at Pantheon Macroeconomics, said.

“The negative contribution from inventories was inevitable after stock building added 5.3 percentage points to fourth-quarter GDP growth, which was as strong as 6.9 per cent,” Paul Ashworth, chief US economist at Capital Economics, said.

The negative first quarter reading is unlikely to deter the US Federal Reserve from pushing ahead with a rapid tightening in monetary policy, Shepherdson added.

Inflation is posing a greater long-term threat to the health of the US economy by injecting greater uncertainty into the business environment and hitting households finances.

In response, Fed Chair Jerome Powell and co will hike interest rates 50 basis points several times this year, starting next week, breaking with the world’s most influential central bank’s tradition of moving borrowing costs in 25 basis point increments.

Higher US rates will deal a blow to the pound by making dollar-denominated assets relatively more attractive, adding to inflationary pressures already hitting the UK economy by making imports more costly.

The Bank of England is widely anticipated to lift interest rates for the fourth meeting in a row next Thursday, taking them to one per cent, in a bid to cool a 30-year high inflation rate of seven per cent.