THE US economy roared back from a lacklustre year-end in 2005 to grow at its fastest pace in 2½ years during the first quarter, in an expansion fuelled by booming government spending and business investment.

The strength of the figures failed to prevent a renewed dollar sell-off, however, as the 4.8 per cent annual pace of growth in the first three months of the year fell short of forecasts, fuelling expectations that the Federal Reserve will soon call a halt to its campaign of interest-rate rises.

The dollar dropped to an 11-month low against the euro, and also fell further against the pound and yen, after the data confounded Wall Street predictions of first-quarter (Q1) growth of 5 per cent or more.

Nevertheless, the Q1 gain in US GDP was still more than twice the 1.7 per cent expansion estimated for the final quarter of last year, and the strongest since the third quarter of 2003.

The robust performance from the world’s biggest economy was fuelled by a surge in government spending driven by reconstruction on America’s Gulf Coast after last year’s devastating hurricanes. Overall federal government spending rose at an annualised rate of 10.8 per cent in Q1, rebounding from a 2.6 per cent decline in the previous three months. It was the strongest rise in US government spending since spring 2003.

Corporate America also boosted its investment activity, with its capital spending rising at a 14.3 per cent annual rate — three times the pace in the final quarter of last year, and the sharpest rise in six years.

Despite these buoyant numbers, the news did little to dispel financial market’s conviction that the Federal Reserve will halt its present run of interest rate increases after a sixteenth consecutive rise next month.

That belief was reinforced by the widespread view that the first quarter’s jump in growth will be followed by an easing in the economy’s expansion in coming quarters, as well as by other key data yesterday.

Within the GDP report, a key gauge of inflation pressures favoured by the Fed and based on consumer spending on items other than food and energy rose at a modest annual rate of 2 per cent in Q1, down from 2.4 per cent in the previous quarter.

American employment costs also rose at their slowest pace in seven years in the first quarter, helping to dispel worries that surging energy costs could drive up wage demands.

The employment cost index showed a 0.6 per cent Q1 increase, down from 0.8 per cent in the previous three months.

Predictions that the pace of US growth will now slacken were bolstered by figures suggesting that rapidly rising fuel prices could dent consumers’ sentiment and spending.

The dollar’s losses pushed the pound to a seven-month high of $1.8179, and the euro to an 11-month high of $1.2635.

Euro rate rise mooted

A JUMP in eurozone inflation and a rise in the bloc’s economic confidence to a five-year high fuelled expectations yesterday that the European Central Bank could order a half-point increase in interest rates in June.

Inflation across the 12-country eurozone climbed to 2.4 per cent in April, from 2.2 per cent in the previous month, in gains blamed on record oil prices.

The European Commission also reported that sentiment among eurozone companies and consumers rose sharply in March, boosted by strengthening confidence in industry and services .

The Commission’s headline confidence index climbed to 105.3, from 103.6 in March, despite predictions of a fall.

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