The COVID-19 (coronavirus) outbreak and sharp decline in oil prices will likely cause a decrease in U.S economic growth, according to the latest commentary from the Fannie Mae Economic and Strategic Research (ESR) Group. Fannie Mae has revised downward its 2020 growth forecast to 1.8 percent 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, said Fannie Mae. ”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, Fannie Mae 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.

The lower interest rate environment is likely to continue to support housing and fuel a surge in refinance activity, even as macroeconomic growth slows, added Fannie Mae.

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“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,” said Fannie Mae Senior Vice President and Chief Economist Doug Duncan.

Visit the Economic & Strategic Research site at fanniemae.com to read the full March 2020 Economic Outlook, including the Economic Developments Commentary, Economic Forecast, Housing Forecast, and Multifamily Market Commentary.