Federal loan servicer Fannie Mae’s Economic and Strategic Research (ESR) Group anticipates a 6.7 percent growth in the U.S. economy in 2021, according to a report released from the company on Thursday.

Such growth would yield a vast improvement from the 2.5 percent contraction seen in 2020, as well as a boost up from Fannie Mae’s previous forecast in January of 5.3 percent.

The company’s upgrade of the full-year 2021 real GDP growth comes on the heels of growth in consumer spending over the winter, declining COVID-19 case rates and hospitalizations, vaccine optimism, and increased likelihood of a fiscal stimulus package.

Doug Duncan | Photo credit: Fannie Mae

One contributing factor for the increase in expected growth, the ESR Group explained, is due to a pull-forward of growth that the group previously thought would take place in 2022. As a result, forecast of full-year growth for 2022 declined this month from 3.6 to 2.8 percent.

“If 2020 was the year of the virus, then 2021 will more than likely be the year of the vaccine,” Doug Duncan, Fannie Mae senior vice president and chief economist, said in a statement.

“Whether the vaccines are effective, including with the new virus strains, and how broadly and timely they can be distributed remain key questions; our forecast assumes such efficacy and that they’ll be widely administered by summer. Further, the recent upward creep of Treasury rates suggests that financial markets currently expect the same.”

Now two months into 2021, the ESR Group upwardly revised its 2021 home sales forecast, previously estimating that the hot market would cool more quickly into the new year. Last month, the group forecasted that annual single-family starts would grow by 12.5 percent in 2021, and this month that estimate was upgraded to 18.6 percent.

The ESR Group also upped its projected mortgaged originations for the year from its previous estimate of $3.9 trillion to $4.1 trillion.

“Consumer interest in locking-in historically low mortgage rates helped drive continued high volumes of refinancing and aggressive levels of homebuying,” Duncan said. “We believe that this will continue in 2021. We assume that the proposed fiscal stimulus of around $1.7 trillion will be passed in mid-March, and that growth will accelerate sharply beginning in the second quarter.”

But, the ESR Group also cautioned that there may be increased risk of stronger inflation and higher interest rates in the year ahead, and possibly weaker growth too, if COVID-19 restrictions are extended past spring.

“However, with the Fed committed to low rates for the foreseeable future, a recovering economy, and already the highest level of debt-funded stimulus in place since World War II, the proposed additional stimulus heightens the risk of rising inflation and interest rates, as well as a potential boom-and-bust scenario,” he added.

“Very strong growth in the second half of 2021 could push inflation, and thereby rates, up significantly in 2022, thus invoking a Fed response of tightening and a significant deceleration later in 2022. This is not our base case scenario, but we see it as a significant risk moving forward.”

Email Lillian Dickerson

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