Goldman Sachs slashed its U.S. growth forecast and is warning that a recession could occur after Russia invaded Ukraine.
The financial services giant cut its forecast gross domestic product growth for the United States to 1.75% this year after previously forecasting a 2% increase in GDP. The downgrade comes as Russian forces continue their invasion of Ukraine, a war that has resulted in soaring energy prices and crippling sanctions for Moscow.
“We now see the risk that the U.S. enters a recession during the next year as broadly in line with the 20-35% odds currently implied by models based on the slope of the yield curve,” said Goldman Sachs chief economist Jan Hatzius.
Goldman Sachs recently said it is “winding down” its business operations in Russia and will comply with the sanctions that have been levied against Moscow in response to the conflict.
BIDEN INFLATION AND ECONOMIC WOES UNLIKELY TO BE FIXED IN TIME FOR MIDTERM ELECTIONS
The war in Ukraine is contributing to the inflationary pressures that are being experienced across the world, but particularly in the U.S., as the COVID-19 pandemic draws to an end and supply chains still remain snarled.
The U.S. recently announced that it would be banning Russian oil imports in response to Russian President Vladimir Putin’s decision to invade, adding to the litany of other sanctions imposed by the U.S. and its European allies.
The national average price for a gallon of gasoline on Friday hit $4.33. The U.S. oil benchmark, West Texas Intermediate crude futures, was pushing $107, a big increase from the $90 it was at before the war broke out. On Sunday, WTI crude briefly touched $130, the highest level since 2008.
The higher energy prices add to the country’s spiraling inflation, which just touched 7.9% for the 12 months ending in February, the fastest rate of inflation since 1982.
In response to the higher prices, the Federal Reserve is gearing up to hike interest rates for the first time in years, with the first rate hike expected to occur after next week’s meeting of the Federal Open Market Committee.
In recent testimony before Congress, Federal Reserve Chairman Jerome Powell said that Russia’s continued invasion of Ukraine will drive oil prices up but assured lawmakers that the central bank stands prepared to deal with the economic fallout from the conflict.
“In the near term, and we already see this, oil prices are up substantially from where they were two months, three months ago,” Powell said before the Senate Banking Committee last week. “And that will get into gasoline prices and other fuel prices, and that will show up in higher inflation. The question, really, is what will be the extent of those, and even more important, what will be their persistence.”
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Powell noted that the near-term effects on the economy from the war and subsequent sanctions “remain highly uncertain.”
“Making appropriate monetary policy in this environment requires a recognition that the economy evolves in unexpected ways. We will need to be nimble in responding to incoming data and the evolving outlook,” he added.
