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Forex Flash: April´s data leads to US growth expectation adjustments - Nomura

FXstreet.com (Barcelona) - Nomura economists note that April data appears to confirm their expectation that the current quarter growth has slowed.

They add that despite the slowdown towards the end of the quarter, the advance estimate of Q1 GDP will likely reflect robust growth from consumer spending and inventory rebuilding. In terms of US economic outlook, incoming data appears to confirm their expectation that current quarter growth has slowed. They note that data released last week has led to them upwardly revising their Q1 GDP tracking estimate by two-tenths of a percentage point to 3.2%, from 3.0% on a soft CPI figure for March, and a jump in utilities output, which suggests more personal consumption expenditure on utilities.

Further, they see that early incoming data on Q2 appear to confirm their expectations that growth in current Q has slowed from what they believe to be a 3 handle pace in Q1. They write, “The first official read on Q1 GDP comes at the end of next week(26 April), but recent volatility in financial markets suggests that stronger growth in Q1 is being treated as yesterday‟s news.

They forecast that Q2 GDP is tracking half the pace of Q1, around an annualised growth rate of 1.4%. They see three main drivers of slower growth in Q2:

Firstly, they see that after a sharp inventory drawdown in late 2012, they believe the need to replenish inventories has contributed roughly one percentage point to GDP growth in Q1. But a slowdown in factory activity late in the quarter has made it apparent that inventory building was frontloaded and there appears to be no need to build inventories further. They write, “This means inventory building is unlikely to boost growth materially in Q2.”

Secondly, they note that consumers appear to have exhausted alternative resources in January and February to battle the effects of higher tax burdens. They see that by March, signs of fatigue set in and US households pared back spending (poor weather was also a factor). The timing of the slowdown is important because it factors into how quarterly annualized growth rates are calculated. They write, “March spending data suggest the so-called “base effect” for Q2 spending is quite low. It will take a fairly heroic effort on the part of households, possibly coming solely from upper-income spending, to get to the 1.5% annualized pace we forecast for Q2 compared with what we believe to be close to a 3% pace in Q1.”

Finally, they note that while they believe that some expectations for the negative economic impact of the sequester have been overblown, they do expect additional drag from a decline in Government spending in Q2.

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