American economy slows as trade gap continues to widen

The US economy grew more slowly than expected in the final quarter of 2004, as inflation quickened and the country's trade deficit expanded to record levels.

The US economy grew more slowly than expected in the final quarter of 2004, as inflation quickened and the country's trade deficit expanded to record levels.

According to provisional figures from the Commerce Department yesterday, US gross domestic product rose at a 3.1 per cent annual rate in the last three months of last year, below the 3.5 per cent predicted by Wall Street.

Analysts blamed the slow-down on surging imports and higher energy prices.

Even so the economy grew by 4.4 per cent over the whole of 2004, the fastest pace since 1999 - underlining how the US economy, in terms of growth at least, is far outperforming most other industrial countries, especially in Europe where euro-area growth is forecast at 1.5 per cent only in 2005.

However, inflation is picking up, according to the Commerce Department's core GDP index - especially closely watched by the Federal Reserve chairman Alan Greenspan - which omits volatile food and energy costs. This index jumped by an annualised 1.6 per cent in the fourth quarter, against 0.9 per cent in the previous three months.

The country's trade imbalance also worsened, with imports of goods and services growing at a 9.1 per cent annual rate, while exports contracting by 6.9 per cent. The US current account deficit is running at record levels, threatening to hit $650bn for 2004, nearly 6 per cent of GDP.

Despite the slower growth, the Federal Reserve is expected to increase its key short-term rates when policymakers meet here on Wednesday. The central bank is likely to lift the overnight fed funds rate by 0.25 per cent to 2.5 per cent, the sixth successive such boost since last summer.

However, mounting US trade and budget deficits are causing worry among trading partners. The issue is likely to feature when G7 finance ministers meet in London next week.

Michael Woolfolk, a currency strategist with Bank of New York, said the GDP numbers were disappointing, and showed a drag from costlier energy, which was unlikely to be reversed while imported oil prices remained high by historic standards.

"It shows the economy has returned to the long-term trend growth rate of 3.1 per cent, the average over the last several decades, as higher interest rates and higher energy prices have an impact," he said.