It’s becoming harder to ignore the risk of a recession as the Iran war causes historic disruptions in energy markets.
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The US economy skated through 2025 on a solid footing, but the bull case for growth is harder to make this year, as forecasters see no clear resolution to the Iran war and its impact on energy markets.
Brent, the international oil benchmark, has stuck close to $100 a barrel throughout the second week of the war. That’s a key psychological threshold in markets that is problematic for a number of reasons. The fear is that higher crude prices could spike inflation while hammering economic growth — two forces that risk tipping the US into a recession later in the year, should supply disruptions in the Middle East continue.
Even before the war, signs were piling up that the economy is probably slowing down.
After coming in below estimates in the first reading, the Commerce Department on Friday revised fourth-quarter GDP down to 0.7%, half the annual growth rate it originally estimated.
The job market also had a dismal month in February. The US lost 92,000 jobs, well short of the estimated gain of more than 50,000.
Goldman Sachs nudged its 2026 recession odds higher this week. In a note to clients, the bank said it bumped up its 12-month recession probability in the US to 25%, up from the prior estimate of 20%, citing the “upside risks” to oil and February’s job losses.
BCA Research, which has leaned more bearish on the US economy and markets for the past year, said it was raising its expected 12-month recession probability in the US to 40%. The firm previously had a 50% recession probability, but had cut its forecast due to positive developments, such as Trump’s tariffs being struck down by the Supreme Court.
Peter Berezin, the chief global strategist at BCA, told Business Insider this week that the recession forecast is based on recent weakness in the job market, slowing retail sales, and the upside risk to inflation from oil prices.
“This wasn’t an economy that was firing all cylinders even before the oil shock,” he said. “If the oil shock persists, that could be enough to drag it down into a recession later this year.”
Nobel Prize-winning economist Paul Krugman also flagged the potential for more dire economic consequences if the oil price shock persists. In a Substack post, he predicted crude oil rising well above $100 a barrel, adding that even $150-a-barrel oil looked “low” to him.
“In the short run, the economic impact of a sustained loss of Gulf oil could be very ugly,” Krugman wrote on Friday.
Previously, Krugman speculated that an extended conflict in the Middle East could be the “straw that breaks the camel’s back” regarding the US economic outlook.
How high will oil prices climb?
Forecasters are eyeing several price levels for oil that could trigger a downturn.
Kristina Hooper, the chief market strategist at Man Group, said she believed that oil rising to $120 to $130 a barrel for a sustained period could trigger a US recession, due to increased cost pressure on consumers.
“We’re already in a K-shaped economy, where the lower leg of the K is under very significant pressure,” she said in an interview on Bloomberg TV this week, referring to the idea that the financial health of lower-income Americans is diverging from higher-income households.
A sustained spike in oil prices to around $140 a barrel for a two-month period could be enough to “push parts of the global economy into a mild recession,” Oxford Economics wrote in a note on Wednesday.
Rory Johnston, an oil market researcher at Commodity Context, said he believes much of the economic outlook is tied to whether the Strait of Hormuz remains closed for a longer period. He outlined one bear case scenario where the supply disruption is so extreme, it causes oil to rise to $250 a barrel.
“This is going to manifest as exceptionally painful prices at the pump. It’s going to sap consumer disposable income and cause that recessionary pressure,” he told CNBC this week about how the scenario could play out in the US and Europe.
