GDP grows at softest pace since Q1 2024 in Q4

GDP reading: GDP growth moderated to 2.3% in seasonally adjusted annualized rate terms (SAAR) in the fourth quarter from 3.1% in the third quarter. This marked the worst reading since Q1 and was below market expectations, as government spending and fixed investment lost steam and private inventories were a larger drag. On an annual basis, economic growth ebbed to 2.5% in Q4, compared to the previous quarter's 2.7% expansion.

Drivers: Private consumption picked up to 4.2% SAAR in Q4, which marked the best reading since Q1 2023 (Q3: +3.7% SAAR). Part of this strength may have derived from consumers front-loading purchases ahead of potential tariff hikes. Government spending grew 2.5% (Q3: +5.1% SAAR). Meanwhile, fixed investment contracted 0.6% in Q4 (Q3: +2.1% SAAR). Finally, exports of goods and services contracted 0.8% (Q3: +9.6% SAAR) while imports of goods and services contracted 0.8% in Q4 (Q3: +10.7% SAAR). As a result, the contribution of the external sector to growth was roughly zero, following a negative contribution in the prior quarter.

GDP outlook: Our Consensus is for economic growth to slow slightly in Q1 2025 compared to Q4 2024, but to remain upbeat compared to other G7 economies, underpinned by resilient consumer spending.

Panelist insight: On consumers front-loading spending, Nomura analysts said: “Spending and borrowing patterns are consistent with front-loaded purchases. Importantly, we also have survey data suggesting tariffs as a likely motivation for this spending. University of Michigan buying conditions demonstrated a surge in consumers saying it was a good time to buy large durable items because prices are likely to rise in the future.” On the outlook, TD Economics’ Admir Kolaj said: “We anticipate a more trend-like pace of growth of around 2% for the year ahead. This as the economic cycle matures, and some of the positive growth impulses from policies such as deregulation are offset by more restrictive policies on trade and immigration. Additionally, efforts to rein in government spending suggest that the fiscal growth-dividend that helped boost growth in previous years – such as in 2018-19 thanks to the Tax Cuts and Jobs Act (TCJA) – may not be there to prop up this economy this time around.”

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