US economy slowed well below expectations in Q1

The US gross domestic product increased by 1.1% in the first three months of this year, following 2.6% growth in the fourth quarter of 2022 and missed consensus for 2% growth.

Much slower than expected economic growth sends an initial warning that economic activity may moderate further in coming months, as the economy starts to feel the full impact of high borrowing costs.

In addition, recent US economic data showed weaker than expected numbers, adding to darkening short-term outlook, despite the US has so far avoided immediate threats of recession.

However, persisting stress in the banking sector, which caused tightening of credit conditions, along with the Fed’s fastest rate hiking cycle in over four decades, continue to weigh on economic activity and increase the risk of a downturn in the second half of the year.

The US Federal Reserve has raised its policy rate by 4.75% since March 2022 and on track for one more 25 basis points hike, according to the latest estimations for the terminal rate just above 5%

All these factors are likely to continue to slow economic growth, although slight optimism still persists as consumer spending, which accounts for more than two thirds of the economic activity, grew faster in the first three moths of this year than sluggish 1.0% increase in Q4, keeping alive hopes that the economy would avoid stronger downturn.