The U.S. economy is expected to grow 6.7%in 2021, an improvement not only from last year’s 2.5% contraction but up, too, compared to last month’s forecast of 5.3%, according to the February 2021 commentary from the Fannie Mae Economic and Strategic Research (ESR) Group. The latest forecast upgrade of full-year 2021 real GDP growth reflects greater-than-expected consumer spending in the winter months, slowing COVID-19 case rates and hospitalizations, and the likelihood of an impending fiscal stimulus package. However, the ESR Group notes that some of the expected growth quickening stems from a pull-forward of growth that was previously expected to take place in 2022; subsequently, its forecast of full-year growth in 2022 decreased 0.8 percentage points this month to 2.8%. The ESR Group’s updated forecast also highlights greater uncertainty and downside risks, including stronger inflation and higher interest rates, as well as potentially weaker growth if COVID-related restrictions persist beyond the spring.
While housing is still expected to moderate in the new year from its unsustainably high pace in the second half of 2020, the ESR Group did upwardly revise its 2021 sales forecast on new data suggesting that the expected cooling will occur over a longer time frame than previously anticipated. Annual single-family starts were also upgraded to 18.6% growth in 2021, up from last month’s forecast of 12.5%. Combined with continued strength in refinances and an otherwise upgraded housing forecast, the ESR Group projects mortgage originations in 2021 to hit $4.1 trillion, a $0.2 trillion improvement from its prior forecast.
“If 2020 was the year of the virus, then 2021 will more than likely be the year of the vaccine,” said Doug Duncan, Fannie Mae senior vice president and chief economist. “Whether the vaccines are effective, including with the new virus strains, and how broadly and timely they can be distributed remain key questions; our forecast assumes such efficacy and that they’ll be widely administered by summer. Further, the recent upward creep of Treasury rates suggests that financial markets currently expect the same.”
“Consumer interest in locking-in historically low mortgage rates helped drive continued high volumes of refinancing and aggressive levels of home-buying,” Duncan continued. “We believe that this will continue in 2021. We assume that the proposed fiscal stimulus of around $1.7 trillion will be passed in mid-March, and that growth will accelerate sharply beginning in the second quarter.”
“However, with the Fed committed to low rates for the foreseeable future, a recovering economy, and already the highest level of debt-funded stimulus in place since World War II, the proposed additional stimulus heightens the risk of rising inflation and interest rates, as well as a potential boom-and-bust scenario. Very strong growth in the second half of 2021 could push inflation, and thereby rates, up significantly in 2022, thus invoking a Fed response of tightening and a significant deceleration later in 2022. This is not our base case scenario, but we see it as a significant risk moving forward.”
Source: Fannie Mae