Resilience of U.S. Economy Tested by COVID-19 Outbreak and Oil Price Shock
Monday, March 16th, 2020
According to the latest commentary from the Fannie Mae (OTCQB: FNMA) Economic and Strategic Research (ESR) Group, the COVID-19 (coronavirus) outbreak and sharp decline in oil prices are likely to result in decreased economic growth. Assuming the outbreak is relatively short-lived, the ESR Group is currently forecasting 1.8 percent full-year 2020 growth, down from its prior month forecast of 2.2 percent. Real GDP growth is now forecast to approach zero in the second quarter before an expected recovery in the second half of the year. However, if the crisis worsens considerably or lasts longer than a few months, a more substantial slowdown or contraction in the global economy is possible. In response, the ESR Group expects the Federal Reserve to maintain its accommodative posture and reduce the federal funds rate by an additional 50 basis points at its next meeting. In early 2021, assuming greater economic stability, the ESR Group expects the Fed to begin raising rates.
While uncertainty and heightened financial volatility may soften demand for "big ticket" items including home purchases, the ESR Group expects historically low mortgage rates to provide some offsetting relief. The lower interest rate environment is likely to continue to support housing and fuel a surge in refinance activity, even as macroeconomic growth slows.
"The recent shocks to the global economy are unprecedented and have introduced immense uncertainty into our economic forecast. While we are still projecting modest growth in the coming months, the impact of the coronavirus threatens the longest expansion in U.S. history," said Fannie Mae Senior Vice President and Chief Economist Doug Duncan. "The rapid international spread of the coronavirus and Saudi Arabia's decision to dramatically increase oil production – and the resulting impacts on financial market volatility and consumer behavior – led us to revise downward our second-quarter growth forecast to near-zero and our full-year 2020 forecast to 1.8 percent from last month's 2.2 percent. However, those forecasts are subject to significant uncertainty, depending on the extent and duration of the coronavirus outbreak, its impact on consumer and business behavior, and government policy response. We expect the FOMC to cut the federal funds rate by an additional 50 basis points at its next meeting, adding to its 50-basis-point cut from earlier this month."