US housing crash cuts GDP, points to cut in Fed rate

Growth in the US economy slowed to its weakest pace for three years over the summer, according to official figures that triggered a drop in share prices across the world.

GDP expanded by 1.6 per cent during the three months to September, down from 2.6 per cent in the second quarter and the slowest advance since the first quarter of 2003.

The slowdown was driven by a slump in the housing market. The report showed that spending on new housing contracted by 17.4 per cent, the biggest annual decline for more than 15 years.

The downbeat figure, which was less than the 2.2 per cent expected by Wall St economists, fuelled speculation the Federal Reserve would have to start cutting interest rates soon.

Richard Iley, the US economist at BNP Paribas in New York, said that there could be worse to come as the slump in housing started pointing to a fall in investment of some 30 per cent in the final quarter of the year. "Another quarter of significantly sub-trend GDP growth should 'shock' the Fed into policy ease early next year and see it continue to cut rates through much of 2007 in a desperate attempt to insulate the economy from the worst effects of the housing market crash."

Stock markets dipped across the world. The FTSE 100, the Dow Jones and the pan-European FTSEurofirst index were all down 0.4 per cent.

The Bush Administration insisted the soft GDP data did not signal the economy was spiralling downward but only that it was moving to a slower and steadier growth rate. "I'm feeling good about making this economic ... transition from an unsustainable rate to a more sustainable rate," Henry Paulson, the Treasury Secretary, said.

- INDEPENDENT