THE US economy came perilously close to flatlining in the first quarter and grew at a meagre 1.3 per cent annual rate in the April-June period, leading economists to warn of recession if a stand-off over US debt does not end quickly.

The commerce department data, released yesterday, also showed the current lull in the economy began earlier than had been thought, with the growth losing steam late last year.

That raised questions on the long-held view by both Federal Reserve officials and independent economists that the slowdown in growth this year was mostly due to transitory factors.

The US economy in the first quarter expanded by just 0.4 per cent, a sharp downward revision from the previously reported 1.9 per cent increase. While the recovery stepped up in the second quarter, economists had expected a stronger 1.9 per cent reading.

Fourth-quarter growth was revised to a 2.3 per cent rate from 3.1 per cent.

“The second quarter disappointed, but the first-quarter downward revision is more disturbing,” said Scott Brown, chief economist at Raymond James in St Petersburg, Florida. “It advances the pangs of concern. The debt ceiling nonsense is not going to help us. We’re already in an economy that is subpar.”

US stocks opened lower on the data, while prices for government debt rose. The dollar fell against a basket of currencies.

Economists had expected the economy would show signs of perking up by now, with Japan supply constraints easing and oil prices off their high, but data has disappointed. This and the sharp downward revisions to the prior quarters suggest a more troubling and fundamental slowdown might be under way.

There is also heightened uncertainty over the outlook because of the impasse in talks to raise the nation’s $14.3 trillion borrowing limit and avoid a damaging government debt default, although the budget cuts which a deal may impose could also weigh on growth.

The US treasury has said it will run out of borrowing authority on Tuesday and the government could quickly run out of enough cash to pay all its bills. – (Reuters)