The economic growth outlook for the second half of the year remains unchanged from the previous forecast of 2%, however, Brexit still caused uncertainty among investors, according to Fannie Mae’s Economic and Strategic Research Group’s July 2016 Economic and Housing Outlook.
On June 23, the U.K. made a decision that shocked the rest of the world: they decided to leave the European Union.
At the time, some experts expected the decision to create an economic disruption felt across the U.S.
“Overall, global economy and job creations could modestly slow down with more frictions in place to do commerce,” said Lawrence Yun, National Association of Realtors chief economist. “The British economy will be disrupted and hence we should expect fewer Brits able to buy in the U.S.”
Now, Fannie Mae Chief Economist Doug Duncan gives insight into what changes the decision could cause for the remainder of 2016.
“Financial volatility resulting from Brexit has created some uncertainty among investors as yields on government bonds have dropped sharply, Treasury yield curves have flattened over the past month, and the Chinese Yuan has depreciated to a six-year low against the dollar,” Duncan said.
“In addition, our view on interest rates continues to be ‘low for long’ as we believe a Fed decision to raise interest rates will likely be on hold until June of 2017,” Duncan said. “Brexit’s economic impact on the U.S. will likely be limited, especially from a trade perspective, and should be a near-term positive for the housing and mortgage market as falling mortgage rates have prompted new refinance demand.”
Not everyone, however, agrees with this statement, and some think the Fed will raise rates at least once this year.
In June, Capital Economics claimed that the Fed will raise rates faster than the markets currently expect. In fact, they say that by the end of next year, rates could increase at least 1.75% to 2%.
Fannie Mae now projects a 2.2% rise in mortgage origination volume in 2016 from 2015 to $1.75 trillion, versus a 2.8% drop in the prior forecast.
“We still expect moderate housing expansion for 2016,” Duncan said “While new home sales have pulled back from their expansion-best, existing home sales rose to the highest level in more than nine years amid the largest year-over-year drop in for-sale inventory since October of 2015.”
“Without relief from new construction, housing inventory will likely remain tight, boosting home prices and constraining affordability,” he said.
Privately owned housing starts in June showed an increase from May, but decreased from June 2015, according to the U.S. Department of Housing and Urban Development.
Consumer spending is expected to drive growth for the rest of 2016 as businesses face headwinds from shrinking profits, weak productivity, and rising labor costs in the face of uncertainty stemming from Brexit and the U.S. presidential election, the report stated.
Government spending and residential investment should be positive contributors to economic growth this year, while nonresidential and inventory investment and net exports are expected to drag on growth, according to the report. Although job creation picked up at the end of the second quarter, the hiring trend has slowed considerably from the start of the year.
