US economy contracts as Ukraine war hits trade

The US economy contracted in the first three months of the year partly due to trade disruption from the Ukraine war.

Figures from the Commerce Department showed that gross domestic product fell at an annualised rate of 1.4%.

Slower growth had been expected but the figure was worse than forecast, marking the first fall since the coronavirus-induced recession in 2020.

Analysts said a surge in imports, as exports fell, made the economy look worse than it was.

“This is noise; not signal,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics. “The economy is not falling into recession.”

Though inflation is running at a four decade high, households have not yet pulled back purchases.

Consumer spending – the engine of the US economy – remained healthy, rising at an annual rate of 2.7% in the quarter, up from the end of last year.

But businesses faced new supply disruptions in the first three months of the year, making trade figures more unpredictable than usual.

Figures this week showed the US trade deficit in goods reached a record high last month, as coronavirus cases triggered shutdowns in China and the war in Ukraine upended key industries, including agriculture and oil.

Analysts said the unexpectedly large surge in imports, which count against US output in calculations of GDP, was probably due to businesses accelerating purchases.

Meanwhile exports fell, hurt in part by lower demand abroad.

A decline in government spending also weighed on growth.

Recession risk

Until now, recovery from the pandemic has largely been faster than expected, helped by government spending, including pandemic relief cheques to households.

In the last three months of 2021, the US economy expanded at an annualised rate of 6.9%.

Analysts said they did not see recession as imminent, despite the contraction, but they warned that rising prices mean that households will not be able to keep spending at their current pace.

“Consumers have been able to maintain positive rates of real spending by reducing their savings rates. But if inflation continues to erode purchasing power, then consumers may eventually decide to retrench,” Wells Fargo economists wrote in a recent note.

The US central bank has started increasing interest rates to try to curb inflation, but that brings economic risks as well, as such moves typically slow activity. Wells Fargo said it saw a 30% chance of recession in 2023.

“Although the US economy does not appear to be on the cusp of another downturn, the probability of recession next year is not insignificant, in our view,” they said.

The days of extraordinary growth associated with the reopening of the economy may be over. But the latest figures suggest that underlying growth in the American economy remains strong, at least for now.

Towards the end of 2021, companies rushed to build up inventories to avoid any supply chain disruptions. Firms wanted to make sure there were no empty shelves over the holiday period. The knock on effect was that they didn’t have to do as much restocking at the start of this year.

America’s growing trade deficit also subtracted 3.2 percentage points from overall GDP growth. Exports fell sharply and imports soared, a reflection of strong demand in the US and weaker economic growth abroad.

Meanwhile, America continues to add jobs, and businesses and consumer spending remain robust.

There are plenty of risks to be worried about – inflationary pressures, new Covid variants, the war in Ukraine and lockdowns in China. But the takeaway from this initial GDP report is that the challenges have hurt more abroad than here in the US.

Credit : www.bbc.com/news/business-61254160

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