New doubts on recovery as US economy falters

The pace of the recovery of the world's largest economy slowed markedly during the second quarter of the year, official data revealed yesterday, prompting further anxiety about the global financial outlook.

The Department of Commerce said that US gross domestic product rose by 2.4 per cent on an annualised basis over the three months to the end of June, down from 3.7 per cent during the first quarter.

The data disappointed investors, who had been expecting a figure of 2.6 per cent or higher, with shares falling across Western stock markets in the hours following the release of the data.

To add to the gloom, the Department of Commerce also revised previously released data to show that the US recession, which lasted from the end of 2007 to the middle of last year, had been worse than previously thought, with the economy contracting by 4.1 per cent during the downturn rather than the initial estimate of 3.7 per cent.

However, economists professed themselves more worried about the future, particularly with the latest consumer confidence survey yesterday from the University of Michigan, a keenly watched indicator, suggesting that Americans are now more gloomy about the prospects for the economy than at any time this year.

Nigel Gault, the chief US economist at IHS Global Insight, said: "The economy entered the second quarter with plenty of momentum, but exited with very little – we expect that growth in the third quarter will be slower."

Christine Romer, an economic adviser to the White House, also warned that America's economy needed to do better. "This solid rate of growth indicates that the process of steady recovery from the recession continues," she said. "Nevertheless, faster growth is needed to bring about substantial reductions in unemployment."

In practice, the latest GDP data was very mixed, with the positive effect of better business investment and some limited improvements from the real estate sector undermined by restrained consumer spending and a poor export performance.

The figures reinforced the warning last week from Ben Bernanke, chairman of the Federal Reserve, who unnerved world markets by telling Congress that the outlook for the US economy was "unusually uncertain".

Mr Bernanke also said that the Fed would intervene if it believed doing so was necessary to keep the recovery on the road. James Bullard, the president of the St Louis Federal Reserve, went further on Thursday, calling for a new round of quantitative easing in the US.

In addition to monetary policy initiatives, pressure is mounting on the US government to do more, with the International Monetary Fund warning yesterday that President Barack Obama may soon have to consider an increase in the stimulus spending he has already embarked upon in order to boost the recovery.

"Looking ahead, risks are elevated and tilted to the downside (as clear from the most recent batch of economic indicators), with particular risks from a double dip in the housing market and spillovers if external financial conditions worsen," the IMF warned.

"With recovery still dependent on policy support, rising downside risks, and substantial long-term fiscal and financial sector challenges, further decisive action is needed to achieve stable medium-term growth and limit risks of adverse international spillovers."