Ukraine’s war hitting its trade has led to a decrease in U.S. Economy

The U.S. economy contracted in the second quarter of this year as the war in Ukraine disrupted trade. The Commerce Department reported that gross domestic product shrank by 2.9 per cent in the April-June period, the most significant decline since the first quarter of 2009. The war in Ukraine has disrupted trade between the U.S. and Europe and led to sanctions against Russia.

The U.S. economy contracted as the conflict in Ukraine hit trade.

 The news is a further blow to the economy, which has been struggling to recover from the financial crisis.

The economy shrank at an annualised rate of 1%, the Commerce Department said.

It was the first contraction since the first quarter of 2011.

The department also revised its estimate for growth in the fourth quarter of last year to 2.6% from 3.2%.

The main reason for the contraction was a sharp fall in exports, which were hit by the conflict in Ukraine.

Imports also fell as a result of the sanctions imposed on Russia by the U.S. and its allies.

However, there were also signs of weakness in the domestic economy, with business investment declining and consumer spending growing more slowly than in previous quarters.

  • The news is likely to increase pressure on the Federal Reserve to delay any increase in interest rates until later in the year.
  • The Fed had been expected to raise rates in June, but some economists are now forecasting that the Fed will wait until December.

“The weak first-quarter GDP report supports the Fed’s patient stance on interest rates and underscores the need for continued data support before any move is made,” said Millan Mulraine, deputy chief economist at T.D. Securities.

Recession risk

Slower growth was expected, but the figure was worse than expected, the first decline since the 2020 coronavirus-induced recession. Analysts say the increase in imports due to falling exports has made the economy worse than it was.   

“This is noise, not a signal,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics. “The economy is not going to be in a recession.” Even though inflation has peaked in 40 years, households have not given up on buying.   

Consumption, the engine of the U.S. economy, remained solid, up 2.7% year-on-year in the quarter from the end of last year. But companies faced new supply disruptions in the first three months, making trade data more unpredictable. This week’s data showed that the U.S. goods trade deficit reached a record high last month as coronavirus cases forced the closure of businesses in China, and the war in Ukraine brought down key industries, including agriculture and the oil industry.    

Analysts say the unexpected surge in imports relies on upon. U.S. manufacturing in their GDP calculations was likely due to faster business buying. In the meantime, exports have dwindled, partly due to declining overseas demand. The decline in government spending also affected growth.

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