US economic growth drops sharply

The US Department of Commerce says the economy grew at an annual rate of just 0.6% from October to December.

In the previous three months, between July and September, the economy was growing at annual rate of 4.9%.

The slowdown was triggered by a slump in building activity, which fell by 16.9%, the biggest fall in 25 years, as housing prices collapsed.

Worse than expected

"This reinforces the odds for a recession"
Mark Zandi, chief economist, Moodys Economy.com

The US slowdown is even bigger than predicted by analysts. who were expecting a reduction to a 1.2% annual growth rate.

And it reinforces the view, recently put forward by the IMF, that the US economic slowdown will be longer and deeper than previously thought - and have a greater impact on the world economy.

The IMF report suggested that even by the end of 2008, the US economy would still only be growing at a year-on-year rate of 0.8%.

And 2007's overall growth rate of 2.2% is already the weakest since 2002, when the US was recovering from an earlier recession.

"The underlying message is that we lost a lot of momentum and stalled in the fourth quarter. This reinforces the odds for a recession," said Mark Zandi, chief economist at Moodys Economy.com.

Rescue plan

The spiralling downturn in the US economy is spurring efforts by politicians and policy-makers to take corrective action.

The US central bank, the Federal Reserve, has already cut interest rates to 3.5% from 4.25% this year in order to boost economic growth, and is expected to cut further when it finishes its regularly scheduled meeting later on Wednesday.

And the US Congress and the Bush Administration have agreed an economic stimulus package which would add $150bn in tax rebates to the economy by the summer. The measure has already been passed by the House of Representatives but is still awaiting Senate approval.

Even the head of the IMF, Dominque Strauss-Kahn, normally a fiscal conservative, has endorsed the need for both monetary and fiscal measures to help stabilise the situation.

But there is little sign yet that the US housing market is bottoming out.

This week, new data showed that US house prices were falling at their fastest rate since the 1930s, while foreclosures (repossessions) in 2007 topped two million after many sub-prime mortgages went sour.

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