Wall Street Raises Alarm Over Recession Odds

(MENAFN- The Arabian Post)

Goldman Sachs has increased the probability of a United States recession in the next 12 months to 45%, aligning with a wave of revised risk assessments by major investment banks as escalating trade tensions and tighter financial conditions unsettle global markets.

The adjustment from Goldman's previous estimate of 35% reflects the firm's assessment that a sharp tightening in financial conditions and heightened policy uncertainty will significantly hinder capital expenditure. The investment bank noted that its economic modelling now assumes a deeper contraction in corporate spending than previously forecasted, particularly in the manufacturing and technology sectors, which are seen as more vulnerable to the impact of tariffs and global supply chain disruption.

The revision follows an executive order from President Donald Trump imposing sweeping tariffs across key imports, a move that triggered a flurry of selling in equity markets and a rally in safe-haven assets such as Treasury bonds and gold. The tariffs, which affect a broad range of goods including consumer electronics, auto parts, and industrial machinery, have raised fears of retaliatory measures from major trading partners, particularly China and the European Union.

Goldman's warning mirrors those from other major banks. J.P. Morgan has now put the probability of a US and global recession at 60%, citing deteriorating trade dynamics, policy disarray, and weakening corporate confidence. Economists at Morgan Stanley and Bank of America have also flagged downside risks, pointing to softening indicators in corporate earnings, industrial production, and labour market trends.

The investment bank's economists emphasised that while the economy remains on a growth trajectory for now, the fragility of the outlook has increased markedly. They flagged a slowdown in business fixed investment and a pullback in hiring intentions as signs that corporations are becoming more defensive. Goldman noted that financial conditions, which include stock prices, bond yields, credit spreads, and the dollar, have tightened at a pace not seen since mid-2022, creating a drag on overall demand.

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Markets have responded to the economic uncertainty with heightened volatility. The S&P 500 posted its worst weekly performance in over a year, while the yield on the 10-year Treasury fell below 3.5%, a sign of growing demand for lower-risk assets. Meanwhile, the Chicago Board Options Exchange Volatility Index , a measure of expected market turbulence, spiked to levels not seen since the banking turmoil last year.

The Federal Reserve has so far maintained a cautious stance, with Chair Jerome Powell reiterating that policy decisions will remain data-dependent. However, traders in futures markets have begun pricing in a higher probability of a rate cut later this year, despite official guidance suggesting the central bank is still leaning toward keeping rates elevated to tame inflation. Inflation pressures have eased from the highs seen in 2022 but remain above the Fed's 2% target, complicating policy manoeuvres.

Corporate leaders are also expressing concern. Several S&P 500 CEOs have signalled in earnings calls that they are reassessing capital expenditure plans due to growing uncertainty around input costs, consumer demand, and regulatory policy. Technology firms, in particular, have paused hiring or initiated selective layoffs, while industrial manufacturers have flagged weaker-than-expected orders in their first-quarter updates.

The tariff measures have been criticised by several trade economists who argue that they may backfire by raising input costs for American firms and reducing their global competitiveness. Analysts point to the possibility of a feedback loop, where retaliatory tariffs from trading partners reduce export demand, adding to the pressure on the domestic economy.

Despite these risks, Goldman Sachs does not yet project a base-case recession but acknowledges that the balance of risks has tilted sharply. The bank anticipates that the drag from trade policy and financial tightening could subtract up to one percentage point from GDP growth over the coming quarters. Should consumer confidence begin to erode or credit conditions deteriorate further, that could tip the economy into contraction.

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Political uncertainty ahead of the presidential election is another variable that has entered analysts' models. The unpredictable policy environment, particularly in relation to trade, immigration, and energy, has increased the risk premium in asset prices, with businesses reluctant to make long-term commitments until there is more clarity.

International financial institutions have also started lowering their US growth forecasts. Forecasts from major economic research houses now suggest that US GDP may expand at less than 1% annualised in the second half of the year, a marked downgrade from projections made earlier this quarter. Eurozone growth is also expected to slow in tandem, exacerbated by a potential decline in transatlantic trade and weaker Chinese import demand.

The dollar has appreciated amid the turmoil, bolstered by its status as a safe-haven currency, but analysts warn that this may further aggravate the slowdown by making US exports less competitive. A stronger dollar also raises the cost of servicing dollar-denominated debt in emerging markets, increasing the risk of financial instability abroad.

Economists at Barclays and Citigroup have noted that supply chain resilience is beginning to erode under the strain of geopolitical tensions and trade policy shifts. Logistics firms are reporting delayed shipments and rerouted cargo traffic, particularly through ports on the Pacific coast, which are bearing the brunt of tariff-induced realignments in sourcing.

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