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U.S. economic growth may be casualty in trade war with China, Fannie Mae says in new forecast

Mortgage rates will probably average 4.2%, higher than the 4.1% forecasted last month

Fannie Mae, the largest mortgage financier, boosted its forecast for mortgage rates and lowered its prediction for GDP growth for the remaining quarters this year, citing the tariff war with China as a primary reason.

GDP growth in the U.S. will probably be 1.7% for the current quarter, down from the 2.1% growth the mortgage giant predicted last month before negotiations over a trade pact with China veered off-course. As part of the rippling effect of boosting the cost of goods imported from China – higher consumer prices will equal higher inflation, a primary influencer for mortgage-bond investors – Fannie Mae said the U.S. rate for a 30-year fixed mortgage will probably average 4.2% in the remainder of the year, up from the 4.1% it forecasted last month.

Investors aren’t just concerned about the trade war with China, Fannie Mae said in a statement accompanying the new forecasts. They’re concerned tariff wars will spread to other countries. Earlier this month the U.S. unexpectedly boosted tariffs on $200 billion of Chinese goods to 25% from 10% and threatened to expand the higher tariff to an additional $325 billion of Chinese imports. 

“Equity markets pulled back sharply in response not merely to the U.S.-China disagreement but also out of concern that it might portend a similar escalation in U.S.-Europe trade tensions,” the statement from Fannie said.

Fannie Mae economists said the surprising jump to GDP in the first quarter – it was 3.2%, better than every major economic forecaster expected – was due to exports. That’s the first time that’s happened since at least 2009. If tariff wars continue, it would be hard to replicate that.

“For the first time in the current expansion, net exports were the largest contributor to quarterly growth, adding a full percentage point to the quarter’s hearty 3.2% annualized rate,” the report said. 

So far, Fannie Mae isn’t expecting the trade war will have a major impact on the housing market, but the new numbers were released within days of the surprise escalation. China announced its retaliatory tariffs on Monday, and Fannie Mae’s new forecast came out on Thursday.

Fannie Mae kept its forecast for year-over-year growth in home prices at 4.6%, and it changed its expectations for existing home sales to a gain of 0.3%, up from last month’s forecast of flat sales.

“Escalating trade tensions between the United States and China continue to represent a real downside risk to headline growth,” Doug Duncan, Fannie Mae’s chief economist, said in the report.

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