The U.S. economy has received a double-barreled hit from the Russia-Ukraine war.
First the surge of commodity prices stemming from the conflict, particularly oil prices, will push inflation higher.
Already consumer prices have soared 7.9% in the 12 months through February, a 40-year high.
In addition, higher prices for gasoline and other goods and services could reduce demand, putting the economic recovery at risk. So it will be difficult for the Federal Reserve to implement enough interest-rate hikes to quell inflation, but not so many as to cause a recession.
“It’s going to be very tricky,” Mark Zandi, chief economist at Moody’s Analytics, told Bloomberg.
“The economic plane is coming into the tarmac at a very high rate of speed, buffeted by severe crosswinds from the pandemic, with a lot of fog created by uncertainty due to geopolitical events.”
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Goldman Sachs economists see the economy at risk, now estimating the chance of recession in the next year at 20% to 35%, in line with models based on the yield curve’s positioning.
“We are downgrading our U.S. GDP forecast to reflect higher oil prices and other drags on growth related to the war in Ukraine,” Goldman economists, led by Jan Hatzius, wrote in a commentary.
“Our commodity strategists’ near-term crude oil and agricultural commodity forecasts imply an effective 0.7% drag on real disposable income that will weigh on spending in 2022.” The strategists see Brent crude hitting $135 per barrel in three to six months, up from $112.61 recently.
Further tightening of financial conditions, weakening consumer sentiment, and slower growth in Europe also will have a negative effect on the economy, Goldman economists said. And it could get even worse if U.S. production gets hit by shortages of key metals.
The economists lowered their estimates for full-year 2022 economic growth to 1.75% from their previous estimate of 2%. For the first quarter, they see growth of just 0.5%, compared to their prior estimate of 1%.
“Even after these downgrades, we still see risks around our growth forecast as skewed to the downside, particularly if sanctions escalate or if oil prices rise even further,” the economists said.
They note that Goldman commodity strategists see a rise to $175 per barrel as possible for Brent oil if the Ukraine war causes a production loss of 4 million barrels a day.
