The fiscal cliff effect? Shock fall in US GDP blamed on spending cuts

A drop-off in government spending, along with a reduction in business inventories, led to an unexpected contraction in the US economy at the end of last year.

Gross domestic product declined by 0.1 per cent in the three months to December, the worst result since the second quarter of 2009.

Behind the pull-back was a hefty fall in business inventories, as companies put off replenishing their warehouses, and government (chiefly defence) spending. Both factors are expected to ease in the current quarter, something which gave heart to economists, who had expected an expansion in output of 1.1 per cent.

Weighing against this is the challenge posed by the hundreds of billions of dollars in spending cuts that had been put off at the start of the year, and which are now due to hit the economy in March.

The GDP figures did not trigger much of a fall on the markets as investors reasoned that the weak backdrop would stop the Federal Reserve from rolling back the special measures put in place to support the economy.

Later in the day the Fed said it was making no changes in interest rates or its bond buying programme.