Recession Odds Are Rising Amid Ukraine Invasion—Here's What Could Pose 'Serious Risk' To U.S. Economy

Topline

Analysts at investment bank Goldman Sachs downgraded their growth outlook for the U.S. economy Thursday to reflect rising oil prices and other risks related to the war in Ukraine, joining a growing chorus of experts warning that rising energy prices and Federal Reserve policy to help combat inflation could throw the nation into a recession.

Goldman downgraded its economic growth outlook on Thursday, citing Russia’s war on Ukraine, and Bank … [+] of America is worried two developments could increase the likelihood of a recession.

AFP via Getty Images

Key Facts

The “largest risk” to the U.S. economy stemming from Russia’s invasion of Ukraine remains higher commodity prices, Goldman economist Joseph Briggs wrote in a Thursday evening research note, forecasting near-term prices could push disposable income down an average 0.7%.

That income drag will likely force households—and lower-income households in particular—to spend a larger share of income on food and gas, thus weighing on overall consumer spending, Briggs said.

Goldman also expects “modest” impediments to economic growth as a result of lower consumer sentiment, lower exports due to slowed economic activity in Europe during the crisis and interest rate hikes in the U.S. that are expected to start next week.

As a result, the team now expects the nation’s gross domestic product will grow at a rate of 2.9% this year, down from 3.1% previously expected, and it’s raising the risk of a recession to between 20% to 35%.

Even after the GDP downgrade, Goldman says risks around the economy are “skewed to the downside,” particularly if sanctions escalate, commodities prices rise even further, or supply chain disruptions from difficulties sourcing key metals (one of Russia’s largest exports, alongside oil) ultimately constrain production, as has already occured for some European automakers.

In a note Friday morning, Bank of America’s Ethan Harris said higher oil prices alone aren’t likely to spur a recession this year, but that he worries a major oil shock combined with stronger-than-anticipated Fed tightening would pose a “serious risk” of a recession.

Contra

“A careful look at the history of U.S. recessions suggests oil is one of many causes,” Harris said Friday, pointing out surging oil prices were likely only the main cause of two recessions, in 1973 and 1990, out of the last nine. “Even in these instances, other factors played a role,” he said, adding he “will get a lot more worried” if he sees both oil prices jump to $175 per barrel, from about $111 now, and “serious” Fed policy tightening.

Crucial Quote

“Following our downgrade, we now see a somewhat higher risk that the U.S. enters a recession over the next year, especially since we now expect below-trend growth in both [the second and first quarters],” Briggs wrote. “While our baseline forecast assumes that further service-sector reopening and spending from excess savings will keep real GDP growth positive in the coming quarters, uncertainty around the outlook is higher than normal.”

Key Background

Rising energy prices have elevated inflation readings during the pandemic to the highest level in decades, and stocks have struggled in recent months as Fed officials work to combat the surge by unwinding the central bank’s pandemic-era stimulus measures. After rising 27% in 2021, the benchmark S&P 500 has tumbled 11% this year. Market uncertainty has only been exacerbated by Russia’s invasion of Ukraine last month, pushing oil prices to nearly 14-year highs and the Vix Index, a measure of short-term volatility expectations, to its highest level this year.

Tangent

Amid an unprecedented surge in gas prices, inflation spiked 7.9% in the 12 months ending in February—the highest rate in 40 years, according to Labor Department data released Thursday. “It is too early to link the recent rise in oil prices to any type of immediate recession, but historically, recessions have followed periods of surging energy prices,” says Robert Schein, the chief investment officer of California-based Blanke Schein Wealth Management.

Recession Odds Are Rising Amid Ukraine Invasion—Here’s What Could Pose ‘Serious Risk’ To U.S. Economy