High oil prices and strong inflation persist, with analysts on Wall Street increasing the probability of a recession: Ernst & Young now sees it at 40%, while Goldman Sachs has raised it to 30%

Wall Street analysts say that with the ongoing conflict in the Middle East causing oil prices to remain high and volatile, the risk of a US economic recession is increasing. Gregory Daco, chief economist at EY-Parthenon, said earlier this week in a report, "The downside risks have significantly increased." Daco said, "In this context, we currently estimate the probability of a recession at 40%, but emphasize that if the Middle East conflict continues for longer or escalates further, this probability could quickly rise." The economist pointed out that disruptions in the Strait of Hormuz and increased risks to oil production indicate that the inflationary environment will be "not just a temporary surge in energy prices but more sustainable." If the conflict escalates, pushing oil prices above $100 per barrel, causing prices of other key commodities to rise, tightening financial conditions, "US inflation rates could rise to around 5%, while real GDP growth could be lowered by more than 1 percentage point, significantly increasing the risk of a recession." The latest Consumer Price Index shows an annual inflation rate of 2.4%, while the "core" inflation rate excluding the volatile energy and food categories rose 2.5% year-on-year. On Wednesday, oil prices fell by more than 3%, as the market continued to track developments around the situation in Iran. US President Trump hinted that the US is in talks with Iran. WTI crude oil fell to around $88 per barrel, while Brent crude fell below $96. Since the outbreak of the conflict between the US and Iran, oil prices have risen by around 25%. Daco also pointed out that there are vulnerabilities in the field of AI-driven investments and private credit, as "liquidity pressures may evolve into challenges in debt repayment." Earlier this week, Goldman Sachs economists also raised the probability of a US economic recession in the next 12 months from 25% last week to 30%, citing rising oil prices and their impact on the global economy. Goldman Sachs chief economist Jan Hatzius said the increase in oil and gas prices would push up the overall global inflation rate by about 1 percentage point and decrease global GDP growth by 0.4 percentage points. Hatzius wrote, "Although the impact of energy on US economic growth may be relatively small, it coincides with tightening financial conditions and a weakening of the fiscal stimulus effect in the second half of the year. Therefore, we currently expect economic growth to be below trend, unemployment to rise, and we will slightly increase the probability of a recession in the next 12 months to 30%." He expects the Federal Reserve to cut rates in September and December, but delays expectations for a rate cut by the Bank of England to 2027, while expecting the European Central Bank to hike rates in April and June. Meanwhile, on the Polymarket betting platform, traders have bet on the probability of the US falling into a recession by the end of 2026, rising from 23% on February 27 (before the outbreak of the Iran war) to 35% on Wednesday.