Omicron, imports expected to restrain U.S. growth in first quarter

WASHINGTON, April 28 (BNA): US economic growth likely slowed sharply in the first quarter as a wave of COVID-19 cases curbed activity, but it held enough fundamental strength to keep expansion on track amid headwinds from rising Inflation and rising interest rates. .

The growth rate, which is expected to be the slowest since the pandemic-induced recession ended about two years ago, will also reflect an increase in imports, Reuters reports.

Economists are divided over whether inventories will contribute to GDP growth after they accounted for the bulk of the GDP acceleration in the fourth quarter.

The Commerce Department’s first-quarter GDP report on Thursday may lead to warnings of stagflation and stagflation from some quarters, but economists have warned that a lower growth number will not be a true picture of the economy, noting that other measures of output such as aggregate. Hours of work and industrial production showed sustained growth in the last quarter.

“We have to remember the context of his slowdown,” said James Knightley, chief international economist at ING in New York. “The Omicron wave, which has hit confidence and people’s movements, largely explains this. Now that we’re out the other side in reasonable shape, we should look to better growth for the second quarter.”

According to a Reuters survey of economists, GDP growth likely rose at an annual rate of 1.1% in the last quarter. That would be a huge step down from the strong 6.9% pace recorded in the fourth quarter. Estimates ranged from a contraction rate as low as 1.4% to a high growth rate of 2.6%.

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The Federal Reserve is expected to raise interest rates by 50 basis points next Wednesday, and will soon begin reducing its asset holdings. The US central bank raised its policy rate by 25 basis points in March, the first increase in more than three years, as part of its fight against inflation. Annual consumer prices rose in March at their fastest pace in 40 years.

But the GDP survey was conducted before Wednesday’s release of data showing a record goods trade deficit in March and continuing increases in retail and wholesale inventories.

A jump in the goods trade deficit, driven by strong import growth, led Goldman Sachs to cut its first-quarter GDP estimate to 1.3% from 1.5%. Citigroup expects the economy to contract at a rate of 1.2%.

Increased imports, which economists have attributed to front loading by companies who fear shortages due to the Russo-Ukrainian war, will stymie growth. However, it is also a sign of strong domestic demand, and economists say it should be the main focus in the GDP report.

The broader trade deficit is believed to have narrowed as much as 1.5 percentage points of GDP growth in the last quarter. With domestic manufacturers lacking the ability to meet demand, imports fill the gap. This will be the seventh consecutive quarter that trade has been subtracted from GDP growth.

Growth in consumer spending, which accounts for more than two-thirds of US economic activity, is expected to pick up from the fourth-quarter pace of 2.5%, despite being impacted by the winter wave of coronavirus cases, driven by the Omicron variable. Even with rising food and gasoline prices, there is no sign yet that consumers are holding back.

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Strong wage gains amid a tight labor market and at least $2 trillion in excess savings accumulated during the pandemic provide a cushion against inflation. According to data from Bank of America Securities, lower-income consumers, who tend to be disproportionately affected by inflation, have shown greater resilience.

“The low-income consumer is likely to remain resilient at least until the end of this year,” said Anna Zhou, US economist at Bank of America Securities in New York.

“But the path for next year and beyond is uncertain. If gasoline prices remain elevated for the foreseeable future, they will eventually affect the purchasing power of consumers despite strong balance sheets.”

Strong growth in business spending on equipment is also expected. As a result, the measure of domestic demand – excluding trade, inventories and government spending – is expected to have grown at nearly double the last quarter’s pace of 2.6%. Final sales to local private buyers account for about 85% of total spending.

“This is consistent with the strong fundamental momentum in the economy despite any pullback from Omicron and additional price hikes due to the war in Ukraine,” said Kevin Cummins, chief US economist at NatWest Markets in Stamford, Connecticut.

However, there are still concerns that the Fed may tighten monetary policy aggressively and push the economy into recession over the next 18 months. The housing market is already showing signs of slowing, with the 30-year fixed-rate mortgage rate rising above 5%.

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But a lot will depend on how quickly geopolitical tensions and supply chains improve and whether inflation comes down.

“Strong fundamentals and easy financial conditions should help support an extension of the economic recovery,” said Sam Pollard, chief economist at Wells Fargo in Charlotte, North Carolina. “There is no doubt that risks stemming from both weak global growth and tightening financial conditions are rising and need to be closely monitored.”

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