"Bending but not breaking": three reasons why Iran's war hasn't collapsed the economy

The world economy is "bending but not breaking", despite the protracted war with Iran and the remaining risks to its growth, according to the chief economist of Goldman Sachs Jan Hatzius. His opinion is quoted by Yahoo Finance.

"If you list the most frequent topics in conversations with market participants, the vast majority of them would be negative. In addition, stock prices are far from cheap. So why are they showing such strong momentum?" - wonders Hatzius in a note to clients.

He cited three reasons why the war in Iran and the resulting closure of the Strait of Hormuz have not yet undermined the global economy and financial markets:

- Oil prices did not rise as much as expected as the global market approached war with unusually high crude inventories;

- shortages of aviation fuel and other petroleum products in some regions were compensated for by "relatively painless" forms of demand reduction - for example, by cutting schedules on less profitable and less important air routes. Airlines canceled more than 75,000 flights for this summer, simultaneously reducing more than 9.3 million passenger seats in their schedules;

- The artificial intelligence boom and supportive fiscal policy helped the stock market as a whole to maintain gains even after a weaker start to the year.

This does not mean that the market is completely free of risks, says Hatzius. Goldman Sachs' estimated probability of a recession in the U.S. in the next 12 months has dropped from 30% to 25%. However, it is still 5 percentage points higher than before the war.

Bank economists also expect consumer spending to slow as the effects of tax refunds fade, gasoline prices continue to rise and wage growth slows.

While the AI boom will almost certainly make companies more efficient, each new jump in productivity "means fewer new jobs for any given GDP growth," Hatzius said. Overall U.S. GDP growth in the first quarter was a preliminary estimate of 2% year-over-year and weaker than expected

According to a Goldman Sachs analyst, some of the secondary effects of AI development - such as rising electronics prices and increased software functionality - could add pressure to already persistently high inflation.

The result is a complex picture for investors: "the base case remains positive, but the risks look asymmetrically negative," Hatzius wrote. At issue is the likelihood of more unfavorable scenarios - for example, a further rise in oil prices and increased damage to the economy.

This article was AI-translated and verified by a human editor