GDP grows at softest pace since Q2 2022 in the first quarter

GDP growth lost steam in Q1, falling to 1.6% in seasonally adjusted annualized rate terms (SAAR) from 3.4% in the fourth quarter of last year. Q1's reading marked the worst result since Q2 2022 and undershot market expectations. Negative net exports and a drag from private inventories dampened the reading. However, underlying economic momentum was strong, with robust private spending and fixed investment outturns. On an annual basis, economic growth ebbed to 3.0% in Q1, from the previous quarter's 3.1% growth.

Household spending growth fell to 2.5% in Q1 (Q4 2023: +3.3% SAAR), but was still robust, thanks to much stronger spending on services. Government consumption growth waned to 1.2% in Q1 (Q4 2023: +4.6% SAAR). Meanwhile, fixed investment growth accelerated to 5.3% in Q1 from the 3.5% expansion in the previous quarter, thanks to a boom in residential investment. On the external front, exports of goods and services growth fell to 0.9% in Q1 (Q4 2023: +5.1% SAAR). Conversely, imports of goods and services growth sped up to 7.2% in Q1 (Q4 2023: +2.2% SAAR).

Our Consensus is for GDP to expand at a roughly similar pace to Q1 in Q2, underpinned by solid private spending.

On the Q1 reading, Nomura analysts said: “Headline GDP came in below expectations for Q1 […] However, most of the surprise was driven by volatile components (inventory investment, trade, and government spending). Real private domestic final sales rose 3.1%, slightly above our expectations and in line with the H2 2023 average.” On the near-term outlook, TD Economics’ analysts said: “Consumer resilience is likely to remain a key driver supporting economic growth over the near-term. Job gains remain plentiful and have shown little indication of slowing. This is helping to support aggregate gains in household income and providing a sustained tailwind to consumer spending. […] for now, it looks like spending momentum has carried over into Q2.”

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