Middle East conflict pushes up energy prices, multiple factors raise the risk of a US recession

How does the Strait of Hormuz risk amplify the US inflation prolonged battle?

【Global Times Comprehensive Report】On the 26th, Yahoo Finance USA cited Wall Street analysts’ reports stating that amid the ongoing Middle East conflict keeping oil prices high, the risk of a US recession is increasing. Gregory Daco, Chief Economist at EY-Parthenon, said that the current forecast for a US recession is 40%; if the Middle East conflict persists or escalates, the probability of a recession will rise rapidly. He believes that the “blockade” of the Strait of Hormuz and the increased risk of disrupted oil production both suggest that inflation could last longer. He estimates that if the conflict continues and oil prices rise above $100 per barrel, combined with rising prices of other key commodities and tightening financial conditions, US inflation could reach 5%, and real GDP growth might decrease by more than 1 percentage point.

Earlier this week, Goldman Sachs also raised the likelihood of a US recession. Goldman Sachs Chief Economist Jan Hatzius noted that, as the US economy faces energy shocks and financial conditions further tighten in the second half of this year, along with diminishing government fiscal stimulus, US economic growth is expected to fall below trend, unemployment will rise, and the probability of a US recession in the next 12 months has been increased from 25% to 30%.

According to data from the American Automobile Association, as of the 25th, the average domestic gasoline price in the US has increased by about $1 per gallon compared to before the US-Iran conflict, a one-month increase of roughly one-third. Last Friday, Oxford Economics revised down the US consumer growth forecast for this year from 2.5% in February to 1.9%, marking the lowest level since 2013 outside of the COVID-19 pandemic period. Oxford Economics believes that the greatest risk to US consumer spending is in durable goods and optional services. Meanwhile, the gap between low-income and high-income households may widen further. Oxford Economics warns that, besides oil prices, two key risks in the consumption sector should be closely watched: first, a significant stock market correction that could weaken high-income households’ spending; second, increased layoffs, which could act as catalysts for a more severe economic slowdown.

A survey report released on the 24th by S&P Global also brought bad news for the US economy. Due to the Middle East conflict pushing up energy and raw material prices, US business activity slowed to its lowest level in 11 months in March, heightening concerns about accelerating inflation in the coming months. The S&P Global survey also showed that deteriorating market sentiment led to the first decline in US private sector employment in over a year.

Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, stated plainly that the signals from the survey are: after the outbreak of the Middle East conflict, the US is facing a “double whammy” of slowing economic growth and rising inflation. He believes the Federal Reserve will need to weigh the risks of rising inflation against the greater risk of economic stagnation, and its next steps will largely depend on the duration of the Middle East conflict and its impact on energy prices and global supply chains. (Zhen Xiang)