Recession Risks and Global Economic Growth
The risk of a recession has decreased significantly since its peak in April, following Donald Trump’s tariff announcements. However, the recent conflict between Israel and Iran has sparked fresh concerns about the path of global economic growth. The conflict has led to a rise in oil prices, which could have a significant impact on the global economy.
The Impact of the Israel-Iran Conflict on Oil Prices
The US airstrikes on Iran’s nuclear facilities have led to a significant increase in the odds of Iran closing the Strait of Hormuz, a major oil-shipping chokepoint. According to Polymarket, the odds of Iran closing the Strait of Hormuz have spiked to over 50%. This has led to a rise in oil prices, with crude oil prices increasing by around $10 per barrel since early June.
The Risk of Recession
Goldman Sachs has stated that it hasn’t cut its recession probability, which currently stands at 30%. The bank’s chief economist, Jan Hatzius, has written that the risk of further military escalation is a major reason for this. A closure of the Strait of Hormuz could lead to a bottleneck in oil supply, sending oil prices and inflation higher.
The Potential Impact on the Global Economy
In a worst-case scenario, oil volumes through the Strait of Hormuz could decrease by 50% for one month, then remain down 10% for another 11 months. This could lead to Brent oil prices peaking at $110 per barrel before coming down to $95 per barrel in the fourth quarter of 2025. Such a disruption in the energy supply could reduce global growth by 0.3 percentage points and send inflation rising by 0.7 percentage points.
Market Concerns
Morgan Stanley has also expressed concerns about the potential impact of rising oil prices on the market. The bank’s chief investment officer and chief equity strategist, Mike Wilson, has stated that a 75% year-over-year rise in oil prices has historically been disruptive enough to impact the business cycle and lead to a recession. The bank sees a potential 19% drop in the S&P 500 as a result of rising oil prices.
Forecasts and Predictions
Some forecasters see the potential for an even higher spike in crude prices. JPMorgan has stated that a 75% increase in oil prices isn’t off the table, with commodities analysts at the bank seeing a 21% chance of a major disruption to energy production in the Persian Gulf. However, such a scenario is not the bank’s base case, with JPMorgan seeing crude oil averaging down to around $60 a barrel by the end of the year and into 2026.
Conclusion
The recent conflict between Israel and Iran has sparked fresh concerns about the path of global economic growth. The rise in oil prices could have a significant impact on the global economy, with the potential to lead to a recession. While some forecasters see the potential for an even higher spike in crude prices, others are more cautious in their predictions. Ultimately, the outcome will depend on a variety of factors, including the severity of the conflict and the response of global leaders. One thing is certain, however: the situation will be closely watched by investors and economists around the world.
