US economy continues to grow – experts expect slump

At the end of the year, the U.S. economy can report significant growth. Economists nevertheless warn against euphoria.

The US economy grew surprisingly strongly at the end of 2022. The gross domestic product (GDP) increased in the fourth quarter on an annualized basis by 2.9 percent, as the Commerce Department announced on Thursday in Washington after an initial estimate. Bank economists, who on average had expected growth of 2.6 percent, however, put the figures into perspective and even spoke of recession risks.

Compared with the third quarter, when growth had been 3.2 percent, the pace of growth was somewhat weaker. According to the ministry, the development in the final quarter can be explained primarily by increases in consumer spending and corporate inventories. By contrast, headwinds came from the weakening real estate market.

Interest rate turnaround expected for end of 2023
Economists highlighted several unfavorable developments compared with the third quarter: private consumption, for example, grew more weakly in the fall quarter than in the summer. Business investment barely increased at all. Construction spending fell nearly as much as in the weak third quarter. “GDP growth is therefore not really intoxicating,” summed up Thomas Gitzel, Chief Economist at VP Bank.

With regard to monetary policy, it is currently expected in the markets that the US Federal Reserve Fed will again slow down its pace of tightening at the next meeting. In December, it had already lowered the rate hike from 0.75 to 0.50 percentage points. A 0.25-point hike is currently expected in early February. As a recession is considered possible in the course of the year, even interest rate cuts are expected towards the end of the year.

“U.S. economy is on the brink of recession”.
Experts saw no reason in the growth figures to revise their expectations for the Fed. “Key leading economic indicators suggest an imminent recession anyway,” said expert Gitzel.

Analyst Dirk Clench of Landesbank Baden-Württemberg is even more explicit: “The U.S. economy is on the brink of recession.” Recently, several economic data and sentiment indicators had turned out weak and had raised fears of an economic downturn.

U.S. growth figures are annualized, meaning they are projected for the year. They thus indicate how strongly the economy would grow if the current pace were to continue for four quarters. This approach is not used in Europe, which is why the growth figures are not directly comparable. To arrive at an approximate growth rate comparable with Europe, the US rate would have to be divided by four.