Bank of America rips up economic forecasts, braces for $100 oil all year on Iran war disruptions
Bank of America analysts predict slower growth, higher inflation and $100 per barrel oil for the year as a result of the Iran war, even if it ends in a few weeks.
“The payoff of the war so far: mild stagflation,” BofA economist Claudio Irigoyen and his team wrote in a note Wednesday, referring to the economic phenomenon of higher inflation coupled with slower growth.
Economists said that while the world economy’s dependence on oil is decreasing, it is becoming more sensitive to natural gas and fertilizer. This poses a huge risk for Europe and emerging economies.
“The Iran war is an energy shock, not an oil shock,” Irogoyen wrote.
Economists predict U.S. growth will take a 50 basis point hit to 2.3% in 2026. Headline inflation is forecast to rise from 2.8% currently to 3.6% in 2026. On a global scale, economists reduced gross domestic product to 3.1% and increased inflation expectations to 3.3%.
“This is consistent with a stagflationary shock that would impact inflation earlier and more significantly than GDP growth, under our new baseline scenario in which oil prices remain near $100 per barrel for the remainder of 2026,” Irigoyen said. he said.
Read more: How do oil price shocks affect your wallet, from gasoline to groceries?
BofA’s analysis assumes the war will end by the end of this month.
Irigoyen wrote that if the conflicts escalate and continue, “the impact of much higher energy prices and a significant correction in asset prices could drag the global economy into a recession scenario.”
Read more: What is a recession and how does it affect you?
Economists still expect the Federal Reserve to cut interest rates by 50 basis points this year, but those cuts have been delayed from the summer to the fall, acknowledging “high risks that these cuts may not occur.”
While Wall Street is gradually postponing interest rate cut expectations, Goldman Sachs also predicts two rate cuts in the fourth quarter.
“The labor market is softening, wage growth is already below the pace that would be consistent with 2% inflation, and inflation expectations are well anchored,” Goldman Sachs analysts wrote on Wednesday.
“In this context, an oil shock large enough to trigger concerns about persistent inflation would likely cause significant economic damage and potentially a recession as well.” they added.
Earlier this week, Fed Chairman Jerome Powell stated that inflation expectations are “well anchored” and that “the trend is to review any supply shocks.” His comments eased growing concerns about a surprise interest rate hike later this year.
