Goldman Sachs cuts its 12-month US recession probability to 25% from 30%, with chief economist Jan Hatzius citing resilient activity and easing financial conditions despite the Strait of Hormuz closure.
Summary:
US recession probability cut to 25% from 30%, with economic activity holding up and financial conditions easing back below pre-war levelsThree factors cited for the moderate growth impact: oil prices rising less than feared, demand destruction absorbing physical shortages, and supportive fiscal policy, AI momentum and financial conditionsHigh pre-war inventories and market confidence that extreme consumer price rises would force a US policy shift have capped the oil price responsePhysical shortages in jet fuel and similar products have been met via a large shift to renewables in China and reduced schedules on lower-value flight routes globallyGoldman’s baseline assumes the Strait of Hormuz reopens gradually, beginning soon and completing in late June, with Brent seen stable near term before dipping to $90 per barrel by year-endHatzius flags that risks remain tilted toward worse outcomes, including higher oil prices and greater economic damage
Goldman Sachs has trimmed its estimate of the probability of a US recession within the next 12 months to 25%, down from 30%, as evidence mounts that the global economy has absorbed the shock of a 10-week closure of the Strait of Hormuz with less damage than many feared.
Chief economist Jan Hatzius pointed to the resilience of economic activity and noted that Goldman Sachs Research’s financial conditions index has now eased back below the levels recorded before the conflict with Iran began. That reversal is a meaningful signal. Financial conditions tightened sharply in the early weeks of the crisis but have since normalised, reducing one of the most direct transmission channels through which geopolitical shocks typically slow growth.
Hatzius identified three distinct reasons why the Hormuz closure has so far proved less economically destructive than anticipated. First, oil prices have not surged as aggressively as pre-conflict models would have suggested. Two factors explain that relative restraint: crude inventories were unusually high heading into the conflict, providing a meaningful buffer, and markets never fully priced in the worst-case supply scenario because traders consistently expected that severe consumer price increases would eventually force a shift in US policy.
Second, physical shortages in refined products, most notably jet fuel, have been absorbed through what Hatzius describes as relatively low-cost demand destruction. China has accelerated its already rapid shift toward renewable energy sources, and airlines have trimmed schedules on routes where yield and load factors make continued flying uneconomic. Neither response has generated the kind of acute economic disruption that a hard supply cliff would have triggered.
Third, the broader macro backdrop has remained supportive. Fiscal policy has continued to provide a cushion, the artificial intelligence investment boom has kept business spending buoyant, and financial conditions, apart from a brief tightening episode in March, have been accommodative throughout the year.
On the oil price outlook, Goldman’s baseline projects Brent to hold steady in the near term before gradually declining to $90 per barrel by year-end. That forecast rests on the assumption that the Strait of Hormuz begins reopening shortly and that the process completes by late June. Hatzius was careful, however, to note that the distribution of risks around that base case is not symmetric. The balance of probabilities, in Goldman’s view, still tilts toward higher oil prices and greater economic damage rather than a smoother resolution.
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Goldman’s revised recession probability and a relatively benign Brent forecast will offer some reassurance to risk assets, but the bank’s own warning that outcomes remain skewed to the downside keeps a meaningful tail risk premium in place. The $90 year-end Brent call is anchored to a gradual Hormuz reopening completing by late June, meaning any slippage in that timeline would quickly invalidate the constructive baseline. Jet fuel and refined product markets bear watching given physical shortages have so far been absorbed through demand destruction rather than supply resolution.
This article was written by Eamonn Sheridan at investinglive.com.