(Yahoo! Finance) - The risk of a recession in the United States is rising as persistently high oil prices amid the Middle East conflict threaten economic growth, Wall Street analysts say.
“Downside risks have increased materially,” EY-Parthenon chief economist Gregory Daco said in a note earlier this week.
"Against this backdrop, 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.
The economist noted disruptions through the Strait of Hormuz and the risk of growing damage to oil production suggest a more persistent inflationary environment “extending beyond a short-lived energy price spike.”
If the war deepens with oil prices above $100 per barrel, higher prices for other key commodities, and tighter financial conditions, “US inflation could rise toward 5% while real GDP growth could be reduced by more than 1 percentage point, significantly heightening recession risks.”
The latest Consumer Price Index read showed an annualized 2.4% over last year, while "core" inflation, excluding volatile energy and food categories, jumped 2.5% from a year ago.
On Wednesday, oil prices retreated by more than 3%, continuing a volatile ride as markets tracked developments surrounding Iran. President Trump has suggested the US is negotiating with Iran. West Texas Intermediate crude (CL=F) fell to around $88, while Brent crude (BZ=F) traded below $96.
Oil prices are roughly 25% higher than they were before the US-Israel conflict with Iran began.
Daco also noted vulnerabilities in AI-driven investments and private credit as “liquidity strains could evolve into solvency challenges.”
Earlier this week, Goldman Sachs economists also lifted their recession risk to 30%, up from 25% just last week, amid rising oil prices and their impact on the global economy.
Chief economist Jan Hatzius noted that the firm's upward revision to oil and gas prices will increase global headline inflation by about 1% and subtract 0.4% from global GDP growth.
"While the energy hit to US growth is likely on the smaller side, it coincides with tighter financial conditions and a waning fiscal boost in H2," wrote Hatzius.
"Thus, we now expect below-trend growth and a rising unemployment rate, and have nudged up our 12-month recession probability to 30% (where it stood in 2025H2)," he added.
The economist foresees Fed cuts in September and December, but pushed Bank of England cuts to 2027 while now anticipating European Central Bank hikes in April and June.
Meanwhile, Polymarket bettors upped the chances they were placing on a US recession by the end of 2026 from 23% on Feb. 27, prior to the Iran war breaking out, to 35% on Wednesday. (Disclosure: Yahoo Finance has a partnership with Polymarket.)
By Ines Ferré - Senior Business Reporter
