Following a first quarter decline, real GDP growth is expected to contract even further in the second quarter due primarily to an unprecedented slowdown in consumer spending, according to the latest commentary from the Fannie Mae Economic and Strategic Research (ESR) Group.
The ESR Group attributes much of the shift in its forecast to the sharp decrease in elective healthcare expenditures, which it believes is short-term, and the ESR Group now predicts second quarter 2020 GDP growth of negative 36.6% and full-year 2020 growth of -5.3%, compared to last month’s forecast of negative 25.3% and -3.1%, respectively.
A partial recovery is forecast for the second half of the year due to supportive monetary and fiscal policies, resumed consumer spending following an elevated savings rate, and expected relaxing of virus-related restrictions and social distancing measures. Risks to the downside include greater consumer caution during the recovery period than expected, as well as a potential second wave of the virus in the fall or winter, while upside risks include a more pronounced and rapid rate of recovery than currently anticipated.
On housing, recent data suggests existing home sales slowed earlier in 2020 than previously forecast. Even so, the ESR Group expects full-year 2020 existing home sales to decline approximately 15%, a figure largely unchanged from last month’s forecast, as homebuying activity is showing signs of stabilizing, including recent upticks in mortgage applications and sales listings.
While job losses and economic uncertainty have almost certainly held back prospective home buyers, the ESR Group believes that declining sales are more strongly a function of supply dynamics, pointing to the recent downturn in Fannie Mae’s Home Purchase Sentiment Index® as evidence–specifically the “good time to sell” survey component, which fell much more sharply than its buy-side equivalent. There also remains anecdotal evidence that sellers are reluctant to cut prices and are opting instead to take their homes off the market until fears of contagion subside and social-distancing measures are eased.
“We expect the contraction in the second quarter of 2020 to represent the floor of the sudden and historic drop in economic activity associated with the coronavirus,” said Doug Duncan, Senior Vice President and Chief Economist, Fannie Mae. “The timing and pace of recovery remains in many ways unknown, as it depends on the dissipation or treatment of the disease and the reaction of the public to its incidence, duration, and severity.”
Visit the Economic & Strategic Research site at fanniemae.com to read the full May 2020 Economic Outlook, including the Economic Developments Commentary, Economic Forecast, Housing Forecast, and Multifamily Market Commentary.