Hope for world economy as US 'nears bottom'

Published on Friday 31 July 2009 21:45

HOPES of a pick-up in the world economy rose yesterday after figures showed that the US was slowly emerging from recession.

Gross domestic product, the total output of goods and services for the US economy, fell 1 per cent in the three months to 30 June, the US Commerce Department said.

The contraction was less than the 1.5 per cent drop economists had expected, and followed a 6.4 per cent drop in the first three months of the year.

Although the US economy has now contracted in four consecutive quarters, economists said the rate of the fall was a sign that growth may soon return, although it would probably be slow.

In a report published yesterday the International Monetary Fund said US economic contraction "seems to be ending".

Nariman Behravesh, chief economist at IHS Global Insight, said the US economy was at "or very near" the bottom of recession.

"We expect real GDP growth in the third quarter to be a small positive," Behravesh said.

"However, the early phases of the recovery are likely to be quite weak."

Yesterday's news failed to stimulate the markets, with the GDP figures accompanied by an unexpected drop in US household demand. Consumer spending, which accounts for almost two-thirds of US economic activity, dropped by 1.2 per cent in the quarter, compared with a rise of 0.8 per cent in the previous quarter.

Arek Ohanissian, from the Centre for Economics and Business Research, said economic signs were improving, but falling demand meant a recovery would be slow.

"Ever rising unemployment levels and increasing household savings rates will put a damper on personal consumption."

The GDP figures paint a similar picture to the economic pattern in Britain. Earlier this month, official figures showed the rate of contraction in the UK economy slowed sharply in the second quarter.

Britain's GDP fell 0.8 per cent in the second quarter, more than had been expected, but down from a 2.4 per cent contraction in the previous quarter.

Ratings agency Fitch yesterday reaffirmed its AAA rating on UK sovereign debt, and gave it a stable outlook.

Analysts at Fitch predicted national debt would hit 80 per cent of GDP by the end of 2010 – adding that this would be about the same as other leading economies.

In March, Standard and Poor's lowered its medium-term outlook on UK debt to "negative" from "stable".

The Fitch analysts said Britain faced some of the most serious challenges of any of the AAA rated economies in the coming years. But the agency was confident that "more ambitious" spending cuts would be announced in future budgets.

Separately the agency forecast that taxpayers would be left with a long-term 40 billion loss stemming from the recent banking bail-out, less than the 50bn estimated in April's Budget.