AMERICA’S high-flying economic recovery came back to earth in the Christmas quarter, sending Wall Street shares lower yesterday but easing fears of an early rise in interest rates.

Output grew at an annual rate of 4 per cent between October and December, leaving gross domestic product up by a respectable 3.1 per cent for 2003 as a whole. But the pace of recovery more than halved from the third quarter, when GDP grew at a frenetic rate of 8.2 per cent a year. Growth in consumer spending also slowed sharply to 2.6 per cent.

Bond and currency traders were initially disappointed. On average, they had predicted that GDP would grow 4.8 per cent in the fourth quarter. The main reason for the apparent weakness in the figures, however, was that government spending stopped growing.

US Government bond prices rose as the markets reconsidered Wednesday’s announcement from Alan Greenspan’s US Federal Reserve, which subtly changed its stance on future US interest rates to make it easier to announce a rise from current 45 year lows over coming months.

The Fed is under pressure from foreign governments to support the sagging dollar. Wall Street traders said, however, that the Fed was now unlikely to raise rates for at least a further three months.

Markets recovered after economists claimed that the composition of growth showed that growth was becoming more balanced and sustainable, allowing the economy to expand by about 4 per cent this year.

Stocks of goods and materials held by business, which continued to fall in the first three quarters, edged up by a modest $6 billion (£3.3 billion) in the final quarter. Business IT investment, housing and exports continued to expand strongly.

There was also more evidence of consumer confidence, even though the recovery has not yet generated more employment. The University of Michigan index, which measures people’s fears of losing their jobs, rose from 92.6 in December to 103.8 in January.

The confidence index, along with a rise in the Chicago region purchasing managers survey, helped push the initially weak dollar up against the euro again.

Any recovery in the dollar will ease tensions at next weekend’s Group of Seven finance ministers’ meeting in Miami. The Commission’s own business confidence index, which sagged from 96.0 to 95.6 in December, recovered partly to 95.8 in January.