US economy contracts 6.1%, interest rates remain on hold

America, the world’s largest economy, has contracted a worse than expected 6.1% in the first quarter of the year and follows the 6.3% decline during the fourth quarter of 2008.

The fourth quarter decline was expected after consumers and businesses were recovering from the demise of Lehman Brothers.

Combined, the two quarters represent the sharpest contraction over a six-month period since 1957-58.

The figures were described as ’surprisingly bad’ in the City and comes amid speculation that at least half a dozen of the 19 largest US banks require additional capital, after stress tests were carried out to establish which financial institutions are in a position to weather the downturn.

In the meantime, businesses have cut investment in new equipment and software by one third - the highest since 1958, while exports plummeted by 30% - the sharpest fall in four decades.

In related news, the US Federal Reserve opted to keep interest rates on hold yesterday at its current range of between zero and 0.25% - a record low. The Fed has taken interest rates to historic lows in order to stave off a prolonged recession.

The Fed hinted that the recession may be easing and confirmed it will continue with its present level of purchasing long-term Government debt to expand money supply.

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