Goldman Sachs doubles recession risk as Iran war drives oil shock
Bank raises 12-month recession probability to 30% as Strait of Hormuz disruption pushes crude toward $100
Goldman Sachs has doubled its probability of a U.S. recession within the next 12 months to 30%, up from 15% in October 2024, citing the stagflationary impact of surging oil prices from escalating conflict in the Middle East. The warning marks a sharp deterioration in the bank's economic outlook after briefly lowering recession odds to 20% in January.
The primary catalyst is the Iran war's disruption of oil flows through the Strait of Hormuz, a critical maritime chokepoint that handles approximately 20 million barrels per day or roughly 20% of global petroleum consumption. Traffic through the strait has plummeted by more than 90%, with some estimates showing a drop to as low as 600,000 barrels per day, representing a 97% decline from normal levels. Goldman Sachs analysts note that alternative pipeline capacity is insufficient to offset this disruption, and they project Brent crude will average $98 per barrel in March and April with upside risks to $110 if flows deteriorate further.
"The global economy faces a major, major threat from the Iran war," International Energy Agency executive director Fatih Birol stated, warning that its impact on oil could surpass the combined effects of the 1970s oil shocks and lead to "major economic problems around the world, the recessions."
The labor market is already showing signs of strain. U.S. employers shed 92,000 jobs in February, according to Bureau of Labor Statistics data, a dramatic miss from economists' expectations for a gain of 50,000 to 60,000 positions. The unemployment rate edged up to 4.4% from 4.3%. Perhaps more concerning, previous months were revised downward by a combined 69,000 jobs, with December's report swinging from an initially reported gain of 48,000 to a loss of 17,000.
The Federal Reserve, which held interest rates steady at 3.5% to 3.75% in its March meeting, now forecasts only one rate cut in 2026—down from previous expectations of multiple cuts. Officials projected headline inflation will reach 2.7% by year-end, up from 2.4% in December and well above the central bank's 2% target. The Fed noted that inflation "remains elevated." Morgan Stanley has pushed its rate cut expectations to September and December from June and September, while J.P. Morgan predicts no cuts through 2026.
Goldman Sachs warned that investors are currently pricing only inflationary shocks from the conflict, potentially underestimating "the devastating impact of high energy costs on global economic growth" and the eventual recession that would follow. With seven of 19 Federal Open Market Committee participants projecting no rate cuts this year, the central bank is signaling it will maintain restrictive policy until inflation shows clearer signs of returning to target.