The United States economy unexpectedly contracted in the first quarter amid a resurgence in Covid-19 cases and drop in pandemic relief money from the government.

But the decline in output is misleading as domestic demand remained strong.

The first decrease in gross domestic product in nearly two years, reported by the Commerce Department on Thursday, was mostly driven by a wider trade deficit as imports surged, and a slowdown in the pace of inventory accumulation from the fourth quarter’s robust pace.

A measure of domestic demand accelerated from the fourth quarter’s pace, allaying fears of either stagflation or a recession.

The Federal Reserve is expected to hike interest rates by 50 basis points next week. The US central bank raised its policy interest rate by 25 basis points in March, and is soon likely to start trimming its asset holdings.

“The economy is still showing some resilience, but the first quarter GDP report signals the start of more moderate growth this year and next, largely in response to higher interest rates,” Sal Guatieri, a senior economist at BMO Capital Markets in Toronto, said. “Despite the contraction, the Fed has little choice but to hike aggressively in May to corral inflation.”

GDP fell at a 1.4pc annualised rate last quarter, the government said in its advance GDP estimate. The economy grew at a robust 6.9pc pace in the fourth quarter.

US president Joe Biden said he was not concerned about a recession after the data was released. “The American economy – powered by working families – continues to be resilient in the face of historic challenges,” He said. “While last quarter’s growth estimate was affected by technical factors, the United States confronts the challenges of Covid-19 around the world, Putin’s unprovoked invasion of Ukraine, and global inflation from a position of strength.”

Imports surged, in part amid front-loading by businesses fearful of shortages because of the Russia-Ukraine war. At the same time, exports plunged. That led to a sharp widening of the trade deficit, which subtracted 3.2 percentage points from GDP growth. Trade has now been a drag on growth for seven straight quarters.

Firms have turned to imports to satisfy demand, with local manufacturers lacking the capacity to boost production. Though businesses continued to restock, the pace moderated from the fourth quarter, resulting in inventory investment cutting 0.84 percentage points from GDP growth.

Growth in consumer spending, which accounts for more than two-thirds of US economic activity, picked up to a rate of 2.7pc from the fourth-quarter’s 2.5pc pace, despite taking a hit from the winter wave of coronavirus cases. Even with food and fuel prices soaring, there is no sign yet of consumers pulling back.

Strong wage gains amid a tightening labour market and at least $2trn (€1.9trn) in excess savings accumulated during the pandemic are providing a cushion against inflation. According to data from Bank of America Securities, lower-income consumers, who tend to be disproportionately affected by inflation, were showing greater resilience.

Still, concerns remain that the Fed could aggressively tighten monetary policy and tip the economy into recession over the next 18 months.

But much would depend on how quickly geopolitical tensions and supply chains ease, and if inflation subsides.