The likelihood of a recession in the United States is increasing, driven by persistently high oil prices due to ongoing Middle East conflicts that threaten economic stability, according to Wall Street analysts. Gregory Daco, chief economist at EY-Parthenon, highlighted this risk in a recent note, stating that the downside risks have significantly escalated. He currently estimates the probability of a recession at 40%, emphasising that this could rise sharply if the conflict intensifies.
Daco pointed out potential disruptions in the Strait of Hormuz and the threat of damage to oil production, which signal a prolonged inflationary environment, likely to extend beyond a brief spike in energy prices. He cautioned that if the conflict escalates and oil prices exceed $100 per barrel, coupled with increased costs for key commodities and tightening financial conditions, inflation in the US could climb towards 5%. Concurrently, real GDP growth could decrease by more than one percentage point, thus amplifying recession risks considerably.
Recent data indicated an annual Consumer Price Index increase of 2.4%, with ‘core’ inflation—excluding volatile food and energy prices—up by 2.5% over the past year. Following volatile movements in the market, oil prices saw a decline of more than 3% on Wednesday as investors reacted to news regarding Iran. West Texas Intermediate crude prices dipped to approximately $88, while Brent crude traded below $96. It’s noteworthy that oil prices have risen about 25% since the onset of the US-Israel conflict with Iran.
Daco also raised concerns regarding vulnerabilities in AI-driven investments and private credit, warning that liquidity issues could escalate into solvency problems. Earlier this week, economists at Goldman Sachs adjusted their recession risk upwards to 30%, from the previous 25%, in response to rising oil prices and their broader impacts on the global economy. Chief economist Jan Hatzius stated that the upward revision of oil and gas prices is expected to increase global headline inflation by around 1% and reduce global GDP growth by 0.4%.
While he believes that the direct impact of energy prices on US growth will be relatively minor, this scenario coincides with tightening financial conditions and diminished fiscal support in the latter half of the year. Consequently, the firm anticipates below-trend growth coupled with a rising unemployment rate, prompting an adjustment of their 12-month recession probability to 30%, a figure that aligns with their expectations for the second half of 2025.
Hatzius forecasts potential interest rate cuts by the Federal Reserve as early as September and December. Conversely, he has deferred cuts by the Bank of England to 2027, while anticipating that the European Central Bank will increase rates in April and June.
In summary, the combination of high oil prices, geopolitical tensions, and tightening financial conditions has raised red flags for the US economy, prompting analysts to reassess recession probabilities and outlooks for inflation and growth.
