Goldman Sachs is warning that markets are a bit too relaxed about the risk posed by the Ukraine situation and economists at the bank have predicted the American economy to fall into recession next year.
Current prices in the market are no longer reflecting the negative scenarios that could pan out from the Russia-Ukraine conflict. The recent reversal in oil prices, which had earlier surged sharply upward, and the out-performance of European assets seem to suggest a “significant relaxation in the market’s assessment of the global implications,” Goldman strategists Vickie Chang and Dominic Wilson said in a note.
Stoxx Europe 600, the benchmark Europe index, has recovered from the decline triggered by the war and is trading around the level it was on Feb. 24, when Moscow invaded Ukraine. Meanwhile, the S&P 500 is trading above the level it was on Feb. 24.
At the moment, assets are “more vulnerable if progress toward a resolution proves fleeting or if energy supplies are disrupted more severely,” the investment bank said.
Goldman predicts a 2.5 percentage point loss in European GDP and a 0.25 point loss in U.S. economic output in 2022, should there be a severe disruption of Russian gas flows. The S&P 500 may fall to the 4,059 level if the Russia-Ukraine conflict worsens, it warned. The S&P 500 was trading at 4,434 as of 18:11 UTC on March 18.
Meanwhile, economists at the bank have scaled down their U.S. GDP predictions for 2022 to 1.75 percent from 2.0 percent while also warning about an upcoming recession.
“While our baseline forecast assumes that further service sector reopening and spending from excess savings will keep real GDP growth positive in the coming quarters, uncertainty around the outlook is higher than normal,” the economists wrote in a note. There is now a 20–35 percent “higher risk” that the United States will be in a recession next year, they added.
However, Federal Reserve Chairman Jerome Powell is not as concerned about the threat of recession. The probability of a recession happening next year is “not particularly elevated,” he said at a recent press conference.
Powell pointed to “strong” aggregate demand, “strong” labor market, “very high levels” of payroll job growth, and “strong” business and household balance sheets to imply that the American economy is stable and will “certainly flourish” in the face of less accommodative monetary policy.
The Fed had raised its benchmark interest rate by 25 basis points on March 16, the first time it has done so since 2018. Officials from the central bank have predicted six additional rate increases in 2022, which is a significant change in policy outlook from December when they only predicted three quarter-point increases for the year.