Barclays cuts US Q1 GDP growth forecast amid weaker consumer spending
Barclays has cut its first-quarter U.S. GDP growth forecast by half a percentage point to 2.5% quarter-on-quarter annualized, citing weaker-than-expected consumer spending and softer income fundamentals in the opening months of the year.
The bank’s full-year 2026 real GDP growth forecast now stands at 2.4% on a fourth-quarter-over-fourth-quarter basis.
The revision follows data showing that real consumer spending rose just 0.1% month-on-month in February, while nominal income declined 0.1% over the same period.
Economists at Barclays cut real personal consumption expenditure growth forecast for the first quarter by a full percentage point to 1.0% annualized, implying lower first-quarter GDP growth.
“We view risks to both consumer spending and activity as skewed to the downside, given the deterioration in consumer sentiment and signal from the latest ISM prints,” a team led by Marc Giannoni wrote.
The U.S.-Iran conflict has weighed heavily on the economic backdrop. March headline CPI inflation surged to 0.9% month-on-month — the hottest reading since mid-2022 — driven primarily by energy prices.
Core CPI came in at a more moderate 0.20% month-on-month, slightly below forecasts, with used car prices falling for the fourth consecutive month partially offsetting upward pressure from apparel and services.
Last week’s minutes from the March Federal Open Market Committee (FOMC) meeting showed increased concern about upside inflation risks stemming from higher energy prices.
The minutes also revealed an internal divide, with some participants favoring more explicitly hawkish policy language while others maintained that rates should eventually be lowered if inflation declines in line with expectations.
Despite the near-term pressures, Barclays kept its rate outlook unchanged. The economists continue to expect “the committee will regain confidence that inflation is moderating and returning toward the 2% goal” and forecast a 25 basis point cut in September, followed by another in March 2027.
Core PCE inflation is seen returning to a target-consistent 0.2% monthly pace by the second half of 2026.
Consumer sentiment, meanwhile, has continued to slide. The preliminary April University of Michigan survey showed consumer expectations falling to 46.1, the lowest since March 1980, though Barclays pointed out that 98% of interviews were completed before the April 7 ceasefire announcement, leaving room for a partial reversal in the final reading.
On the labor market front, March payrolls increased by 178,000, but economists attributed part of the strength to temporary factors, including the return of striking healthcare workers and favorable weather. The unemployment rate fell to 4.3%, driven largely by slowing labor supply.
“We view the data as pointing to a moderate pace of underlying job growth despite the sharp upside surprise in March payroll gains,” the economists said.
Overall, while the temporary ceasefire calmed markets, economists highlighted that the war’s imprints remained visible across inflation expectations and consumer sentiment. Longer-run measures, they said, “remain anchored for now.”
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