Recession Odds Rise, But Remain Unlikely; Fragile Growth at Risk if Iran Crisis Continues

Recession Odds Increase, But Remain Uncertain

Marcellus Investment Managers' Head of Global Equities, Arindam Mandal, believes that the recession odds have increased, but it is not yet the base case. The US economy is moving toward a more fragile growth environment if the West Asia crisis persists at scale.

Key Factors:

• Risk-off sentiment can persist due to low visibility, as markets assess the scale of the crisis.
• Oil prices above $100 a barrel reflect a risk premium, rather than a definitive signal of a prolonged conflict.
• US economy sensitivity to fuel prices through consumption and inflation channels makes a prolonged spike unlikely.

Read also: Treasury Yields Experience Largest Increase in Two Weeks Following Release of Labor Market Data

Impact of Higher Oil Prices:

• A short-lived spike in oil prices is manageable and tends to act as a sentiment shock.
• A sustained period above $100 can add 0.5 to 0.7 percentage points to inflation and shave off 0.1 to 0.3 percentage points from US GDP growth.
• Persistence, not the level itself, is the key variable.

Recession Likelihood:

• Recession odds have increased, but it is not yet the base case.
• The US economy entered this phase with reasonable momentum, with the Atlanta Fed GDP now estimate for Q1 tracking close to 2.5 to 3 percent.
• Sustained oil shocks can gradually erode real incomes and corporate margins, weakening demand.

Read also: US-Iran Tensions Spark Uptick in Oil Prices Amid Global Market Decline

Market Sentiment:

• Risk-off sentiment can persist due to low visibility.
• Valuations in key equity markets may become attractive now.
• Market rotation has shifted toward large-cap US growth, particularly AI-linked names.

Currency Markets:

• The US dollar is likely to remain supported around current levels, driven by safe-haven flows, relatively stronger US growth, and the impact of higher oil prices.
• The dollar's trajectory remains closely tied to how the conflict evolves.

Gold Prices:

• Gold prices are currently balancing two opposing forces: geopolitical uncertainty and inflation risks, and a relatively firm dollar and higher real rates.