Moody’s Analytics model forecasts a 49% probability of recession in the U.S. within the next 12 months — the highest risk in recent years.
The authoritative financial agency Moody's has warned that its leading AI-based economic model assessed the probability of a recession in the U.S. within the next 12 months at 49% before the war with Iran, cautioning that due to high oil prices, this figure is now likely to exceed 50%.
The company also emphasized that the model has a solid historical track record, and the current probability of recession is the highest in many years.
Euronews spoke with Moody's Analytics Chief Economist Mark Zandi, who explained that "the recent spike is primarily driven by weak labor market indicators, but nearly all economic data has weakened since the end of last year."
The model's sensitivity to energy prices is not accidental: every recession in the U.S. after World War II, except for the downturn during the COVID-19 pandemic, was preceded by a sharp rise in oil prices.
And although the U.S. currently produces about as much oil as it consumes, Zandi explained why rising prices are still felt so painfully.
"Higher oil prices hit American consumers much harder and much faster, causing them to become cautious in their spending, than they convince American oil producers to ramp up investment and production," the economist noted.
The consequences of the war with Iran continue to shake the global economy
As noted in a recent analysis by Euronews, markets may be underestimating the potential of the war with Iran to disrupt global energy markets and, consequently, harm the global economy, especially if the conflict drags on.
The Strait of Hormuz, through which about one-fifth of the world's oil passes, remains blocked at the time of writing, and the war with Iran shows no signs of ending soon. The benchmark price of U.S. oil is currently trading at $94 per barrel.
According to Zandi, American producers are unlikely to quickly increase production as they consider the current price spike to be short-term.
"We are still a long way from the point where increased investment and employment can offset consumer losses," he stated.
Weakness in the U.S. labor market fuels recession fears
According to Zandi, weak employment is the main factor raising the probability of a recession in the U.S.
"Employment decreased in February and has generally been stagnant for about a year. Employment is the best indicator of current economic activity," the economist explained, also pointing to other alarming signals such as a decline in housing permits and worsening consumer sentiment.
In sixteen of the last nineteen reports from the U.S. Bureau of Labor Statistics (BLS) on the labor market, data had to be revised downward after publication – the highest rate since 2008.
Commenting on this statistic and the apparent unreliability of U.S. labor market data, Zandi noted: "If anything, this indicates that the labor market is even weaker, and the risks of recession are even higher than current data suggests."
At the same time, the chief economist of Moody's made an important caveat: "If the labor market could somehow hold up, I don't think that merely increased inflation could push the U.S. economy into recession."
According to Zandi, it is the rising cost of energy resources due to the war with Iran, combined with a weakening labor market, as indicated by BLS data, that could ultimately lead to "a weakening of consumer spending, which would then force businesses to cut back on activity and lay off employees, triggering a self-reinforcing negative cycle."
Noting that many economists have become more cautious in their recession forecasts after previous false alarms, Zandi believes that if oil prices remain at their current level for a few more weeks amid the Federal Reserve's tightening cycle, the economy will have little opportunity to avoid a downturn without support measures or de-escalation in the Middle East.
The combination of zero employment growth and rising costs due to expensive energy makes the U.S. economy vulnerable to a self-reinforcing slowdown.
The impact of the war with Iran on the global economy
A recession in the U.S. is likely to also hit the EU economy, reducing demand for European exports, tightening financial conditions, and slowing growth across the bloc, although Europe's own resilience and diversified trade connections may mitigate the damage.
For the global economy, every 10% increase in oil prices, if sustained for most of the year, raises global inflation by 0.4 percentage points and could reduce global output by 0.2%, said IMF Managing Director Kristalina Georgieva.
In a recent report, Oxford Economics identified the $140 per barrel oil price as the threshold at which the global economy slips into a mild recession: by the end of the year, global GDP would decline by 0.7%, and the economies of the UK, Eurozone, and Japan would enter a downturn.
