Fannie Mae reduced its economic growth expectations for 2022 and 2023 amid record inflation and higher interest rates, according to the company’s latest forecast.
Fannie Mae’s Economic and Strategic Research (ESR) Group projected that real gross domestic product (GDP) will increase 0.1% in 2022 and then decrease 0.4% in 2023, according to its July commentary. This is down from its previous forecast of a 1.2% increase in 2022 and a 0.1% decrease in 2023.
In the first quarter of 2022, real GDP decreased by 1.6% annually, according to the Bureau of Economic Analysis (BEA).
The ESR Group also predicted that a recession will begin in the first quarter of next year, earlier than it had previously forecasted. This is due to the aggressive monetary action the Federal Reserve has taken in order to bring down inflation levels.
"Consumer confidence measures increasingly indicate dissatisfaction with current levels of inflation, offering support to the Fed’s aggressive posture," Doug Duncan, Fannie Mae's senior vice president and chief economist, said. "We continue to believe that it’s unlikely the economy will avoid a modest recession, but given recently released consumer spending and business investment data, we currently anticipate that it’ll begin in the first quarter of 2023, slightly earlier than we previously predicted."
A recession occurs when the economy sees two consecutive quarters of negative GDP growth.
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Inflation could slow in years ahead
Although inflation is currently at a 40-year high, Fannie Mae said it could slow in the coming months.
The rate of inflation could moderate to 5.7% annually by the fourth quarter of 2022, according to the ESR Group. This would be down significantly from its current level — the Consumer Price Index (CPI) rose 9.1% annually in June, its highest point since November 1981. Fannie Mae projected that inflation will drop to 1.6% by the end of 2023, which is below the Fed’s target of 2%.
The ESR Group predicted that key components in determining the rate of inflation, like the cost of shelter, will see price growth slow in the year ahead. It also forecasted a strong deceleration in home price growth going forward as mortgage rates and the economy overall weigh on purchase demand.
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Fed likely to continue raising rates
The Federal Reserve raised interest rates for the fourth time this year at the conclusion of its July meeting with a 75-basis point rate hike. In the months ahead, the Fed is likely to continue raising interest rates as it combats high levels of inflation. In June, the Fed also raised rates by 75 basis points, the highest increase since 1994.
"The economy slowed significantly, though unevenly, in the first half of 2022 on the expectation that the Fed will aggressively raise interest rates," Duncan said. "With inflation running well above the target rate, the market’s expectation that further, substantial monetary tightening is needed has driven interest rates even higher, and interest rate-sensitive sectors, including housing, are slowing in response."
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