Goldman Sachs: Global Economy Bending, Not Breaking, Despite Iran Conflict
The bank lowers US recession probability to 25% but warns of asymmetric negative risks, including slowing wage growth and sticky inflation pressures from productivity gains.
Goldman Sachs chief economist Jan Hatzius has characterised the global economy as "bending, not breaking" as the conflict in Iran enters its fourth month. In a client note published on Monday, Hatzius addressed the disconnect between widespread market pessimism and the continued strength of equity indices, attributing resilience to three primary structural factors.
The bank argues that the months-long closure of the Strait of Hormuz has not derailed economic activity as initially feared. This stability is largely due to unusually high global oil inventories that have prevented the price rallies typically associated with such supply disruptions. Additionally, regional shortages in sectors such as aviation have been absorbed through "relatively painless" demand destruction, primarily via reduced schedules on less critical flight routes.
Support for the market rally has also been bolstered by the artificial intelligence boom and supportive fiscal policy. These elements have helped sustain investor confidence despite a slower start to the year. Consequently, the S&P 500 and Nasdaq Composite have reached repeated all-time highs, driven by long-term profit expectations linked to AI productivity gains.
Despite the market highs, Hatzius warned of "asymmetrically negative" risks. Goldman Sachs has lowered its 12-month probability of a US recession from 30% to 25%, citing strong private domestic sales, robust job creation with 115,000 jobs added in April, and a strong earnings season. However, the bank notes that the recession outlook remains 5% above prewar levels.
Concerns are mounting regarding slowing wage growth and the potential for consumer spending to contract as tax refund cash flow dries up and gas prices rise. Hatzius also highlighted second-order effects from AI, noting that increased efficiency may result in fewer new jobs per unit of GDP growth. Furthermore, higher electronics prices and expanded software features could exert upward pressure on already sticky inflation.
Investors are now looking to upcoming economic data for further signals. Consumer inflation figures are due for release on Tuesday, followed by wholesale inflation numbers on Wednesday, as market participants assess whether the economy can maintain its current trajectory amid these complex headwinds.
