The influential financial firm Moody’s warned that their leading AI-based economic model put the probability of a US recession starting in the next 12 months at 49% before the Iran war, alerting that high oil prices are now likely to make it cross 50%.
The company further highlighted that the model has a strong historical record and that the current probability of a recession is the highest in years.
Euronews spoke with Moody’s Analytics chief economist Mark Zandi who explained that “behind the recent jump are primarily the weak labour market numbers, but almost all the economic data has turned soft since the end of last year.”
Moreover, the model’s sensitivity to energy costs is no accident. Every US recession since World War II, apart from the Covid-19 pandemic downturn, was preceded by a spike in oil prices.
Even though the US now produces roughly as much crude as it consumes, Zandi clarified why higher prices still bite hard.
“Higher oil prices hurt US consumers much harder and cause them to turn more cautious in their spending much faster than it convinces US oil producers to increase investment and production,” the economist noted.
As a recent Euronews analysis highlighted, markets may be underestimating the Iran war’s potential to disrupt global energy markets, and consequently damage the global economy, especially if the conflict prolongs.
The Strait of Hormuz, which carries about one-fifth of the world’s oil, remains blocked at the time of writing and the Iran war still has no end in sight. The US crude benchmark is currently trading at $94 per barrel.
Zandi told Euronews that US producers are unlikely to ramp up output quickly because they view the price spike as short-lived.
“We are a long way from the point where higher investment and hiring would offset consumer pain,” he stated.
US labour market fragility fuels recession fears
Weak employment is the single biggest factor pushing up the US recession odds, according to Zandi.
“Employment in February fell, and has gone more or less sideways for the past year. Employment is the best measure of coincident economic activity,” the economist explained while also pointing to other soft signals such as a decline in residential building permits and consumer sentiment.
Sixteen out of the last nineteen job reports by the US Bureau of Labor Statistics (BLS) had downward revisions shortly after being released, the highest amount since 2008.
When asked about this statistic and the apparent unreliability of US job market data, Zandi noted that “if anything, it suggests the job market is even weaker and recession risks are even higher than the current data shows.”
However, Moody’s chief economist added the important caveat that “if the job market were somehow able to hold its own, I don’t think higher inflation alone would be sufficient to push the US economy into recession.”
Zandi specified that it is the rising energy costs, due to the Iran war paired with a declining job market, as BLS data suggests, could ultimately cause a “weakening in consumer spending which in turn causes businesses to pull back and lay off workers, ultimately ignite a self-reinforcing negative cycle”.
While acknowledging that many economists have grown reluctant to forecast recessions after earlier false alarms, if oil prices remain at current levels for even just a few more weeks and following the Federal Reserve’s tightening cycle, Zandi sees limited escape routes without policy support or de-escalation in the Middle East.
The combination of no job growth and energy-driven cost pressures leaves the US economy vulnerable to a self-reinforcing slowdown.
Iran war’s impact on the global economy
A US recession would likely weigh on the EU economy by reducing demand for European exports, tightening financial conditions and slowing growth across the bloc, though Europe’s own resilience and diversified trade ties could help limit the damage.
For the global economy, every 10% increase in oil prices, provided they persist for most of the year, will push up global inflation by 0.4% and reduce worldwide economic output by as much as 0.2%, said Kristalina Georgieva, managing director of the IMF.
In a recent report, Oxford Economics identified $140 per oil barrel as the threshold at which the global economy tips into mild recession, reducing world GDP by 0.7% by year-end and pushing the UK, the Eurozone and Japan into contraction.