Middle East crisis impact! Goldman Sachs lowers U.S. economic outlook, delays rate cut expectation to September, warns stock market sell-off may exceed average levels

Middle East crisis impact! Goldman Sachs lowers U.S. economic outlook, delays rate cut expectation to September, warns stock market sell-off may exceed average levels

After the outbreak of the Iran conflict, oil prices have become the core variable affecting the U.S. economy.

According to Wind Chasing Trading Desk, Goldman Sachs estimated in its March 11 report that Brent crude oil's average price in March and April will be $98, about 40% higher than the average for all of 2025, then gradually falling to $71 by the end of 2026.

Based on the new oil price trajectory, Goldman Sachs comprehensively assessed the impact of the U.S.-Iran conflict on the U.S. economy, delaying the first interest rate cut from June to September, with another cut in December, and warned that in the most severe geopolitical shocks in history (such as the Gulf War, 9/11), stock market declines have exceeded the average level.

Specifically, Goldman Sachs raised its forecast for overall PCE inflation in December 2026 by 0.8 percentage points to 2.9%, with the spring peak possibly reaching 5% in an extreme scenario; the forecast for Q4/Q4 GDP growth in 2026 was lowered by 0.3 percentage points to 2.2% (full-year figure 2.6%). The peak unemployment rate was raised to 4.6%, and the probability of recession in the next 12 months increased from 20% to 25%.

Oil prices are the core transmission chain: Brent crude could surge to $145 per barrel

Goldman Sachs commodity strategists believe that the main transmission channel for the U.S.-Iran conflict's impact on the U.S. economy is oil prices.

Under the baseline scenario, Brent crude is expected to average $98 per barrel in March and April, about 40% higher than the 2025 average, then gradually falling to $71 per barrel in Q4 2026.

However, upside risks cannot be ignored:

  • Adverse scenario: If oil flows in the Strait of Hormuz are interrupted for about a month, Brent crude's average price in March and April could reach $110 per barrel, falling to $76 in Q4 2026;
  • Extreme adverse scenario: If the Strait of Hormuz is interrupted for as long as 60 days, the average price of oil in March and April could reach $145 per barrel, remaining at a high level of $93 in Q4 2026.

Goldman's rule of thumb shows: Every sustained 10% rise in oil prices pushes up overall PCE inflation by 0.2 percentage points, core PCE inflation by 0.04 percentage points, and drags GDP growth down by about 0.1 percentage points. If the oil price rise is temporary and gradually fades, the impact on growth is about half of the aforementioned values.

Meanwhile, Goldman's Financial Conditions Index (FCI) has tightened by about 0.2 percentage points, and the Fed's Geopolitical Risk Index has quickly risen to four times its historical average.

Historically, it's not just oil prices that truly cripple the economy

Goldman Sachs reviewed the impact of geopolitical conflicts on markets and the economy, and drew three key conclusions.

First, oil price shocks often last longer than tightened financial conditions. Historically, the 1973-1974 OPEC oil embargo led to a 452% rise in oil prices, and oil prices doubled during the Gulf War. But it's worth noting that the current U.S. economy is much less sensitive to oil price shocks than in the past, because the oil intensity of U.S. GDP has significantly decreased, and the rise of shale oil means increased domestic energy capital spending can partly offset declines in real income and consumption when oil prices rise.

Second, geopolitical risks impact the economy beyond oil prices. Fed research found that when geopolitical risk shocks and oil price shocks occur simultaneously, the drag on core corporate capital expenditures and monthly employment is about twice that of a stand-alone geopolitical risk shock.

Third, stock market sell-offs and confidence collapse are common features of the worst-hit economic scenarios. In the most severe recent geopolitical shocks to the economy—the Gulf War and 9/11—stock market declines have exceeded the average, consumer confidence dropped sharply, and the Gulf War was accompanied by a significant jump in oil prices. These factors combined to deliver the most severe shocks.

Economic forecasts deteriorate: inflation rises, growth pressured, unemployment increases

Based on new oil price forecasts, historical experience, and details from the February CPI report, Goldman Sachs has comprehensively revised its U.S. economic forecasts:

Inflation forecast (upward revision):

Forecast for overall PCE inflation in December 2026 raised by 0.8 percentage points to 2.9%; core PCE inflation estimate raised by 0.2 percentage points to 2.4%;In adverse oil price scenarios, overall PCE inflation could reach 3.3%, with a spring peak of 4.5%, core PCE at 2.5%;In extreme adverse scenarios, overall PCE inflation could reach 4.0%, spring peak at 5%, core PCE at 2.7%.

Growth forecast (downward revision):

Forecast for Q4/Q4 GDP growth in 2026 lowered by 0.3 percentage points to 2.2% (full-year basis 2.6%);In adverse oil price scenarios, GDP growth is 2.1% (Q4/Q4) or 2.5% (full-year);In extreme adverse scenarios, GDP growth is 1.9% (Q4/Q4) or 2.4% (full-year).

Labor market (worsens):

  • Forecast for peak unemployment rate raised from 4.44% in February to 4.6% (expected to peak in Q3 2026);

Recession risk (rises):

  • Probability of recession in the next 12 months raised by 5 percentage points to 25%, 10 percentage points higher than the long-term unconditional average, but in line with Bloomberg's latest consensus forecast.

Fed rate cut delayed: First rate cut postponed from June to September

Goldman originally expected the Fed to cut rates by 25 basis points each in June and September; now these two rate cuts have been postponed to September and December, with the terminal rate still at 3%-3.25%. The premise for September rate cut is further softening of the labor market along with continued improvement in core inflation.

But Goldman also drew a clear line of priority: if the deterioration in employment is faster than expected, inflation worries triggered by oil prices will not be an obstacle for the Fed to cut rates ahead of schedule. The February employment report has kept these concerns "active", and with GDP downside and rising geopolitical risks, the probability of further weakening in employment is also increasing.

In scenario analysis, Goldman assigned the following probabilities to each path:

  • Baseline scenario (rate cuts in September and December): probability 40%;
  • High inflation/high growth/high terminal rate scenario (prolonged high rates): probability 20%;
  • Preventive rate cut scenario: probability 15%;
  • Recession scenario (large rate cuts): probability 25%.

Of the four Fed scenario paths given by Goldman, the probability-weighted forecast path is still more dovish than market pricing—meaning that if the recession scenario (25% probability) comes true, the market may be underestimating the actual degree of Fed easing.

 

 

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