US GDP Touches 37-Year High of 5.7% for Year 2021

The US fourth quarter GDP numbers at 6.9% came in much better than expected. The consensus estimates were pegging the US fourth quarter growth between 5.5% at 6%. This is substantially higher than the 2.3% growth witnessed in the third quarter ended Sep-21, indicating that despite the Omnicron scare, growth was back for real.

More that the quarterly GDP, it was the annual GDP that was more interesting. At 5.7% GDP for the full year 2021, this was the best GDP growth for the full year recorded since 1984, a full 37 years ago. This growth comes on the back of contraction of -2.3% in the year 2020 due to the pandemic, hinting that US economy has started growing positively over the pre-COVID levels of GDP.

The gains in the GDP arose from a surge in private inventory investment, strong consumer activity as reflected in personal consumption expenditures, exports, and business spending as measured by non-resident fixed investment. However, the lower government spending in the recent quarters has had some sobering effect on the GDP, as has the higher level of imports, especially the rising US trade deficit with China.

In a way, this only underlines the FED perception that the growth in the US economy was back to sustainable levels. It would also lend credence to the statement given by the US FED that growth and labour conditions were back on track while the inflation situation was spiralling out of control. The latest GDP growth number only underscores the FED commitment to move rapidly and move aggressively on rate hikes.

Even the labour numbers have shown good traction with jobless claims lower by 30,000 over the week. Consumer activity, which accounts for over two-thirds of GDP, rose 3.3% for the Dec-21 quarter. Interestingly, inventories added 490 bps to the headline growth,  hinting that a lot of growth is coming from stocking and may not be exactly sustainable.

The FED in its statement after the FED meet conclusion on 26-January has pencilled its first rate hike  by March 2022 once the taper is completed. The CME Fedwatch is factoring in rate hikes of up to 100-125 bps by June and 175 bps by December 2022. The entire rate hike chain is expected to be completed by June 2023. With the robust growth numbers reported by the US economy, it looks like rate hikes could stay on track.

Check - FED Hints at Rate Hikes from March 2022

For the Indian economy, there are two diverse trends. Firstly, the solid US GDP growth is likely to give a boost to tech spending by US companies and import demand. However, on the downside it also means that for the time being, the rate hike trajectory of the US Fed may be on track. That would be the immediate concern for the RBI and for Indian economy.