The odds of a recession are rising in the US with Brent crude oil prices surging significantly, warn Wall Street analysts. The conflict in the Middle East is threatening economic stability, and the downside is not capped. The world is unprepared to handle the situation of a $200 barrel of oil, which Iran warned this month.
“Downside risks have increased materially,” said EY-Parthenon chief economist Gregory Daco. The economist explained that the odds of a recession have reached 40%. If the conflict fails to de-escalate, the odds would rise further and impact the markets.
“Against this backdrop (of the Iran war), we now place the probability of recession at 40%, but stress that those odds could rapidly rise in the event of a more prolonged or severe Middle East conflict,” said Daco. Therefore, de-escalation is now the only choice left to avoid major economic damage.
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Recession Odds Will Surge If Oil Prices Remain Above $100
If oil prices consistently remain higher than $100 a barrel, prices of key commodities would tighten. Inflation in the US could rise by 5%, affecting the economy, which raises recession odds. “US inflation could rise toward 5% while real GDP growth could be reduced by more than 1 percentage point, significantly heightening recession risks.”
The blockade of the Strait of Hormuz is not a short-lived damage, but the ripple effects will be felt for years, explained Daco. This increases the odds of a recession as the normal flow of trade is already disrupted. The growing oil prices suggest a more persistent inflationary environment “extending beyond a short-lived energy price spike,” he said.
Daco stressed that AI-related investments would also face challenges in these testing times. “Liquidity strains could evolve into solvency challenges,” he said, while tech titans will scramble to safeguard their investments. Tech giants tightening their purses will lead to unemployment among those in white-collar jobs.