Downgrade in US growth forecast sparks recovery fears

Fears remained over a slowdown in the global recovery today after a downgrade in US economic growth overshadowed a more upbeat set of figures in the UK.

The US Commerce Department said gross domestic product (GDP) rose at an annualised rate of 1.6% in April to June, down from an initial estimate of 2.4%.

The sluggish advance in the US economy, down from a 3.7% expansion in the first quarter, followed an upward revision to UK GDP growth by the Office for National Statistics (ONS), from 1.1% to 1.2% - a rate not seen in nine years.

But economists warned that US woes revealed a regression in the worldwide recovery, and further gains of such magnitude in UK growth are unlikely - particularly in the face of fierce austerity measures.

Samuel Tombs, economist with Capital Economics, said today's figures showed there was "increasing evidence that the global recovery is faltering".

The advance in UK growth - the strongest since the same figure was achieved in the first quarter of 2001 - was driven by record-breaking gains in the construction sector, which expanded by 8.5%, its best performance since the first quarter of 1982.

The strong growth was coupled with a promising 0.7% increase in consumer spending - compared with a fall of 0.1% in the first quarter - boosted by World Cup sales of food, drink and televisions.

But today's ONS figures also revealed a slight downward revision to growth in the services sector, which accounts for more than 70% of GDP, from 0.9% to 0.7%, while investment fell by 2.4% on the quarter.

Hours after the UK data was released, the US Bureau of Economic Analysis (BEA) revealed its downward revision of US growth.

The report is the latest in a string of dismal updates from the US, which have included weak home sales and poor durable goods orders.

Analysts said the news will increase the pressure on central bankers, including the Bank of England and the US Federal Reserve.

Owen James, economist at the Centre for Economics and Business Research (CEBR), said: "With a truck load of miserable US economic reports recently, there are growing cries for the Fed to take further action to boost the recovery.

"The consensus mood among the central bankers will be one of genuine concern at the weakening performance of the world's largest economy. Today's data will only add to that."

In the UK, economists warned growth and household spending were likely to dwindle as measures in Chancellor George Osborne's belt-tightening Budget kick in.

Andrew Goodwin, senior economic adviser to the Ernst & Young ITEM Club, said: "The public sector will soon become a drag on growth as austerity measures begin to bite, and it would be unrealistic to expect the consumer sector to contribute much, given the numerous headwinds buffeting households."