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Last Updated: Friday, 29 April, 2005, 05:30 GMT 06:30 UK
Higher oil prices hit US growth
Oil refinery in California
Analysts believe higher oil prices could continue to hit US growth
The US economy expanded at its slowest pace in two years in the first three months of 2005, official figures show.

Gross domestic product (GDP) grew at an annual rate of 3.1%, as consumers and businesses tightened their belts in the wake of rising energy prices.

The Commerce Department figures were the weakest since the first quarter of 2003, when GDP expanded by just 1.9%.

The weaker-than-expected growth figures knocked more than 1% off the major US stock indexes on Thursday.

The Dow Jones Industrial Average shed 1.2%, the Nasdaq technology stocks index closed 1.3% lower, while the broader S&P 500 index lost 1.1%.

Oil prices

Many analysts had expected a more robust figure of 3.6% for the first three months of 2005, and the data revealed a sharp slowdown since the final quarter of 2004, when GDP grew by 3.8%.

"Investment, which we had hoped would continue to drive overall GDP growth, stalled badly," said Paul Ashworth, an economist with London-based Capital Economics.

Oil prices have hovered at historically high levels in recent months - with US light crude topping $56 dollars a barrel before dropping back.

Many analysts now believe higher energy prices could hit US economic growth during the second quarter of 2005.

Nonetheless, economists think the slowdown is not steep enough to deter the US central bank from raising interest rates to curb inflation.

The US Federal Reserve's rate setting meeting next week is widely expected to raise interest rates to 3% from 2.75%.

Mr Ashworth said the combination of slower consumer spending and slower business investment meant the chances were rising that the Fed would "need to change course and stop raising rates".

"However, for the moment we expect it to continue raising rates at a measured pace for the next couple of meetings," he added.

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