Blow for Biden as US economy slows sharply and recession threat grows

The US economy is already in recession, economists have warned after official figures revealed activity slowed sharply at the start of this year, dealing a blow to Joe Biden’s re-election campaign.

The world’s biggest economy grew at an annualised pace of 1.1pc in the first three months of the year, according to the Bureau of Economic Analysis.

This compares with growth of 2.6pc in the final quarter of 2022 and falls short of economists’ expectations for 2pc growth.

While the rise in gross domestic product (GDP) was driven by robust consumer spending, it also suggests nine consecutive interest rate rises by the Federal Reserve are beginning to drag on growth.

President Biden has announced he will run for re-election in 2024, this week touting his efforts to revive the American economy after the pandemic.

But Ian Shepherdson, chief economist at Pantheon Macroeconomics, said activity at the start of the year was boosted by one-off factors including the warmer weather and a 8.7pc one-off cost of living adjustment to benefits.

He added that a sharp slowdown in business activity in the coming months would hit the economy, while slower hiring “was likely to make people nervous”, and put a brake on spending.

“In short, the economy barely grew in the first quarter, but it is likely to shrink outright in Q2 and Q3,” Mr Shepherdson said. “Welcome to the recession.”

It came as economists at Goldman Sachs warned that interest rates in the UK will hit 5pc, potentially saddling thousands of homeowners with hundreds of pounds in extra mortgage payments.

The investment bank said the Bank of England had been “too pessimistic” about the UK economy, with growth likely to be stronger than expected in the coming months, forcing policymakers to lift rates from their current 4.25pc level.

“We therefore expect the Bank to continue to hike in 25bp [basis point] steps until 5pc, despite its reluctance to do so,” Goldman Sachs said.

“Another 25bp hike at the May meeting is very likely, paired with a significant upgrade to the MPC’s growth projection, which have turned out to be too pessimistic. We believe that it will be difficult for the Bank to stop tightening in light of the firm data and we look for two further 25bp steps in June and August.”

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Meanwhile, the boss of Barclays warned that the UK economy is still not “out of the woods”, despite the bank posting its strongest quarterly profit since 2011.

CS Venkatakrishnan, who has returned to working in the office following treatment for cancer, said: “The macro-economic outlook around the world – not only the UK or in the US – is a little better today than it was six months ago. That doesn’t mean they’re out of the woods.”

“I mean, inflation is falling … growth is flattish, it’s better than we thought it would be. But it’s still not back to what we would consider we’d need to see for a ‘soft landing’. And so I think that that requires us to be a little cautious because the rate rising cycle is not complete.”

It came as profits at the FTSE 100 lender jumped by more than a quarter during the first three months of the year after rising interest rates boosted its retail banking and credit cards businesses.

Net profit came in at £1.8bn for the first quarter, up from £1.4bn during the same period last year. Revenues climbed by more than a tenth to £7.2bn, beating expectations.

The bank’s UK consumer lending arm posted a particularly strong quarter with profits jumping by nearly a third. Barclays said this was “primarily driven by net interest income growth from higher rates”.