US economy beats predictions

The US economy outperformed expectations in the third quarter, with robust consumer spending and a tight job market driving growth. The government’s initial estimate revealed that the economy expanded at an annual rate of 4.9% from July to September. This marked the most substantial increase since the final quarter of 2021, exceeding the anticipated 4.5% growth for the third quarter. Consumer spending, accounting for over two-thirds of economic activity in the US, was the primary driver of this growth, surging from 2.1% in the previous three months to the July-September period.

The increase can be attributed to factors such as accelerated consumer spending, private inventory investment, and federal government spending, according to the US Bureau of Economic Analysis.

This strong economic performance raises questions about earlier predictions of a possible recession in the world’s largest economy. The data precedes a crucial meeting of the US Federal Reserve, where the decision to raise interest rates is under consideration. Some economists had expressed concerns that the central bank’s efforts to combat rising prices, by raising rates to their highest levels in 22 years, might trigger an economic downturn. Increasing interest rates is a primary tool for central banks to address inflation by making borrowing more expensive, thereby reducing consumer spending and slowing price increases. So far, the US economy has defied the worst forecasts.

However, some experts, like Kathy Bostjancic, Chief Economist at Nationwide, anticipate a slowdown in the final quarter of 2023. Bostjancic suggests that consumers may be using the last of their pandemic-related savings, and the Federal Reserve might consider further rate hikes as it contends with persistent inflation.

In a separate update, the US Labor Department reported that the number of people seeking unemployment benefits remains low. Nevertheless, growth in the final quarter could face challenges, including strikes by the United Auto Workers and the resumption of student loan repayments by millions of Americans, which may strain their budgets.

In a related development, the European Central Bank (ECB) decided to leave interest rates unchanged, despite its previous series of rate hikes in response to rapidly rising prices. Eurozone inflation peaked at 10.6% in October 2022 but has since been gradually decreasing, reaching 4.3% in September. The ECB emphasised that while inflation remains elevated, the cost of borrowing has risen sufficiently. Analysts note that, despite ongoing global uncertainties, the focus is shifting toward potential rate cuts as the Euro area economy is currently experiencing stagnation.