Barclays reduces Q1 growth forecast
Barclays has revised down its forecast for U.S. economic growth in the opening quarter of the year, trimming its GDP estimate by 0.5 percentage point to 2.5% quarter-on-quarter annualized. The bank pointed to underwhelming consumer spending and weaker income fundamentals during the early months as the primary drivers of the downgrade.
Full-year view and consumption outlook
On a full-year basis, Barclays now projects 2026 real GDP growth of 2.4% measured fourth-quarter-over-fourth-quarter. The firm also scaled back its estimate for real personal consumption expenditures in Q1 by a full percentage point to a 1.0% annualized rate, a move that feeds into the weaker GDP projection.
Recent data underpinning the revision showed real consumer spending rising just 0.1% month-on-month in February, while nominal income fell 0.1% over the same period. Those reads led Barclays economists to lower their consumption forecast and to adopt a more cautious stance on near-term demand.
Bank commentary on risks
On downside risks, Barclays' team led by Marc Giannoni wrote: "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." The note highlights consumer sentiment and manufacturing and services indicators as warning signs for household spending.
Inflation and energy effects
Inflation developments in March complicated the backdrop. Headline consumer price inflation accelerated 0.9% month-on-month in March - the fastest monthly increase since mid-2022 - with energy prices cited as the primary contributor. Core CPI recorded a more muted 0.20% month-on-month gain, slightly under expectations, with falling used car prices for a fourth straight month partially offsetting upward pressure from apparel and services.
Minutes from the March Federal Open Market Committee meeting showed officials growing more concerned about upside inflation risks stemming from higher energy costs. The minutes also exposed differences of view within the committee, with some participants favoring more explicitly hawkish language while others stressed that rates should eventually come down if inflation declines in line with expectations.
Policy outlook and inflation path
Despite the recent inflation pressures, Barclays left its interest-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. Barclays also projects that core PCE inflation will return to a target-consistent 0.2% monthly pace by the second half of 2026.
Consumer sentiment and geopolitical context
Consumer sentiment has weakened further, with the preliminary April University of Michigan survey showing consumer expectations at 46.1, the lowest level since March 1980. Barclays noted that 98% of interviews for the survey were completed before the April 7 ceasefire announcement, leaving open the possibility of a partial reversal in the final reading.
Labor market dynamics
On the labor front, March payrolls rose by 178,000, though Barclays' economists cautioned that part of that strength reflected temporary influences such as the return of striking healthcare workers and favorable weather. The unemployment rate decreased to 4.3%, a move the bank said was 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 added.
Overall assessment
Barclays concluded that while a temporary ceasefire had calmed markets, the impact of the conflict remained visible across inflation expectations and consumer sentiment. The bank noted that longer-run measures "remain anchored for now." The mix of softer consumption, mixed inflation signals and labor market nuances informed the firm's more cautious Q1 growth estimate and its maintained, but gradually easing, rate path.