Markets dip on warning despite surge in growth in US economy

By Perry Gourley
Published on Saturday 28 January 2012 00:00

THE world’s biggest economy, the United States, grew at its fastest pace in 18 months in the closing months of last year although warnings of slowing growth ahead sparked falls on world markets.

The 2.8 per cent rise in GDP was slightly below market hopes of more than 3 per cent and with much of the rise down to rebuilding of stocks by businesses, the figure was seen as disappointing.

US markets fell – the Dow Jones Industrial Average closed down 74.17 points at 12,660.46 last night – with news that Fitch Ratings had downgraded the sovereign debt ratings of Belgium, Cyprus, Italy, Slovenia and Spain adding to the gloom.

Fitch said it was concerned about the vulnerability of the countries to further financial shocks. Earlier this month, Standard & Poor’s downgraded nine eurozone economies, including France

In the UK, the FTSE 100 closed down almost 62 points at just over 5,733, close to its lowest for the day.

Although the US figures showed that consumer spending grew quickly during the quarter, a fall in government spending and growth in imports held back overall progress.

Michael Sheldon, chief market strategist at RDM Financial, said that while the headline number was positive the detail of the figures “indicated that the economy is not doing all that well”.

But Rob Harbron, economist at the Centre for Economics and Business Research, viewed the figure more positively and said it confirms that the US economy is in “quite a different place” to Europe. “In particular, US output is now significantly higher than the pre-financial crisis peak and is expected to fare well over the coming year too with official forecasts for GDP in 2012 is for up to 2.7 per cent growth.”

But Harbron cautioned that the US was not “totally out of the danger zone” yet. “As restocking provided a boost to the figure, a subsequent winding down of inventories over the coming months could act as a brake,” he added.

Michael Hewson, market analyst at CMC Markets, also warned that the Q4 figure could “well get revised lower as is often the case”.

Expectations of soft growth in the US this week had led the Federal Reserve to say it expected to keep interest rates at rock bottom levels at least through to late 2014.

Chairman Ben Bernanke said the central bank still faced big risks, which was taken as a suggestion the eurozone debt crisis could still hit hard. The economy grew 1.7 per cent in 2011 after expanding 3 per cent the previous year.

Before the Fitch announcement late in the afternoon, there had been contrasting news from Europe as Poland announced strong growth figures but Spain saw unemployment pass the five million mark.

Poland’s economy, the largest of the European Union’s eastern states, which last year expanded at its fastest pace since 2008, is expected to grow by more than 3 per cent this year.

The country, which is benefiting from significant flows of inward investment, was the only one in the 27-nation bloc to avoid a recession in 2009.

Spain’s national statistics institute said 5.3 million people were out of work at the end of December, up from 4.9 million in the third quarter. The rate rose from 21.5 per cent in the third quarter to 22.8 per cent – the highest in nearly 17 years. Spain already has the highest jobless rate in the eurozone and is expected to slide back into recession.

MARKETS, PAGES 46&47

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