Goldman Sachs Warns: Markets Have Priced in Inflation, Not Recession from the Iran Conflict

Original author: Gao Zhi Mou

Source: Wall Street Journal

In its latest flagship macro report, "Top of Mind," released on March 20, Goldman Sachs warned that global assets are currently fully priced for an "inflation shock" but are completely ignoring the devastating impact of high energy costs on global economic growth.

The report states that the "knot" in the Strait of Hormuz means the war is unlikely to end in the short term, and once market expectations are proven wrong, "downside growth (recession)" will be the second shoe to drop, triggering an extremely violent reversal in global asset pricing.

Due to the prolonged risk of crisis, Goldman Sachs has substantially lowered its 2026 growth forecasts for the U.S., the eurozone, and other major economies, raised its inflation expectations, and significantly delayed the next Fed rate cut from June to September.

It is worth noting that, according to CCTV News on March 22, Iran’s representative to the International Maritime Organization stated that Iran permits vessels from non-"adversarial" countries to transit the Strait of Hormuz, provided they coordinate with Iran on security matters and make appropriate arrangements.

Goldman Sachs believes that the central uncertainty of this conflict is not whether U.S. forces can achieve tactical victory, but when the “global energy chokepoint” of the Strait of Hormuz will be unblocked.

In the report, former U.S. Fifth Fleet commander Donegan cited detailed data to confirm the military advantage of the United States and Israel.

But military advantage cannot be translated into an end to the war.

Vakil, Director of the Middle East Program at Chatham House, believes Iran views this conflict as a "war of survival." Iran learned from the "Twelve-Day War" in June 2025, when its premature concessions exposed its weaknesses.

Therefore, Iran’s current strategy is to wage a protracted war using asymmetric weapons such as low-cost drones, spreading the costs as widely as possible until it secures guarantees for the long-term survival of the Islamic Republic (including substantial sanctions relief). Vakil emphasizes:

It has no motive to end this war until it sees a reliable path to these guarantees in Iran.

In addition, Iran’s command structure is far more resilient than the market imagines. Vakil notes that the Islamic Revolutionary Guard Corps (IRGC) is managing day-to-day defense through a decentralized “mosaic command structure,” and this bureaucratic system remains effectively operational.

Former U.S. Middle East envoy Ambassador Dennis Ross revealed another deadlock from Washington’s perspective: had Iran not controlled the Strait of Hormuz, Trump might have already declared victory. Today, Trump has every reason to claim that Iran poses no conventional threat to its neighbors for at least five years, but “as long as Iran controls who can export oil and who can pass through the strait, he cannot declare victory and stop.”

Ross believes that, in the absence of U.S. military ability to seize territory along the strait, mediation facilitated by Russian President Putin may be the fastest way to break the deadlock. However, the conditions for mediation are currently absent, especially since Ali Larijani, the former speaker of parliament and the key figure in Iran most capable of coordinating among factions—including the IRGC—has recently been killed, creating a leadership vacuum that significantly reduces the likelihood of a peace agreement being reached in the near term.

So, can military escort break the deadlock of physical supply disruption? Donegan’s answer was stark: capable of escorting, but lacking the capacity to restore normal flow.

Although the United States and its allies (the UK, France, Germany, Italy, Japan, etc.) have signaled their readiness to participate in escort operations and have conducted related military exercises over the past 15 years, Donegan emphasized that the escort model inherently lacks economies of scale.

He assessed that military escorting could restore at most 20% of normal oil flows, and with an additional 15-20% from land pipelines, there would still be a massive gap from normal levels. There is no “switch” to restore supply; the ultimate initiative lies with Iran—

This is not merely a military issue, but a博弈 of motivations and leverage among all parties.

Data from Goldman Sachs’ commodities team quantified the historic scale of this shock: estimated losses in Persian Gulf oil flows have reached up to 17.6 million barrels per day, accounting for 17% of global supply—18 times the peak disruption of Russian oil in April 2022. Actual flow through the Strait of Hormuz has plummeted from a normal 20 million barrels per day to just 600,000 barrels per day, a decline of up to 97%.

Although some crude oil is being rerouted via the Saudi East-West Pipeline (to Yanbu Port) and the UAE Habshan-Fujairah Pipeline, Goldman Sachs estimates that the net rerouted flow capacity of these two pipelines is limited to just 1.8 million barrels per day, a drop in the bucket.

Based on this, Goldman Sachs has constructed three medium-term oil price scenarios:

• Scenario 1 (Most optimistic: Recovery to pre-war traffic within one month): The average Brent crude oil price for Q4 2026 is projected at $71 per barrel. Global commercial inventories will face a loss of 6% (617 million barrels), which can be offset by approximately 50% through IEA member releases of strategic petroleum reserves (SPR) and the absorption of Russian seaborne crude.
• Scenario Two (interruption lasting 60 days until April 28): The average Brent price in Q4 26 is expected to surge to $93 per barrel. Inventory losses will expand to nearly 20% (1.816 billion barrels), with policy responses offsetting only about 30%.
• Scenario 3 (Extreme: 60-day disruption compounded by long-term Middle East production damage): If Middle East production remains 2 million barrels per day below normal levels after reopening, Brent crude oil prices will reach $110 per barrel in the fourth quarter of 2027.

Goldman Sachs warns that if sluggish traffic keeps the market focused on long-term disruption risks, Brent crude is highly likely to surpass its 2008 historical high. Historical data shows that, four years after the five largest supply shocks in the past, production in affected countries remained on average more than 40% below normal levels. Given that about 25% of production in the Persian Gulf comes from offshore operations, the engineering complexity implies that the capacity recovery period will be extremely prolonged.

The crisis in the liquefied natural gas (LNG) market is also significant.

The European natural gas benchmark (TTF) price has surged over 90% since before the war to €61/MWh. More critically, according to Saad Al-Kaabi, CEO of Qatar Energy, the damage caused by Iranian missiles to the 77 mtpa Ras Laffan LNG facility will result in 17% of the country’s LNG production capacity being shut down over the next 2–3 years.

Goldman Sachs noted that if Qatar's LNG production is halted for more than two months, TTF prices could approach €100/MWh. Goldman Sachs’ previous expectation of the “largest LNG supply surge in history in 2027” is now at risk of being significantly delayed.

In response to the crisis, the U.S. government has deployed multiple policy tools: coordinating the release of 172 million barrels from the SPR (approximately 1.4 million barrels per day on average), waiving sanctions on Russian and Venezuelan oil, and suspending the Jones Act for 60 days.

However, Alec Phillips, Chief Political Economist at Goldman Sachs America, noted that U.S. SPR inventories are already below 60% of capacity and are projected to plummet to 33% by mid-year under current plans, leaving limited room for further releases. Regarding market concerns about an oil export ban, while “very likely,” it is not currently part of the baseline assumption.

The impact of energy shocks on the global macroeconomy is becoming evident. Joseph Briggs, a senior global economist at Goldman Sachs, has proposed a key “rule of thumb”: for every 10% increase in oil prices, global GDP declines by more than 0.1%, and overall global inflation rises by 0.2 percentage points (with greater impacts in certain Asian countries and Europe), while core inflation increases by 0.03 to 0.06 percentage points.

Based on this estimate, the current three-week disruption has already dragged down global GDP by approximately 0.3%; if the disruption extends to 60 days, global GDP could decline by 0.9% and global prices could rise by 1.7%. Coupled with the global financial conditions index (FCI) having tightened significantly by 51 basis points since the outbreak of hostilities, the risk of economic slowdown is rising sharply.

However, Kamakshya Trivedi, Chief FX and Emerging Markets Strategist at Goldman Sachs, pinpointed the most critical vulnerability in today’s global market pricing structure: the market is completely not pricing in the risk of downside growth.

Trivedi analyzed that global assets have so far treated this conflict merely as an "inflation shock." This is reflected in: hawkish repricing in interest rate markets (G10 and emerging market front-end yields surged sharply, with the UK and Hungary—previously pricing in the most rate cuts—showing the most pronounced reactions); and strict differentiation along the terms of trade (ToT) axis in foreign exchange markets (the US dollar strengthened, while energy-exporting currencies such as the Norwegian krone, Canadian dollar, and Brazilian real outperformed, and import-dependent currencies in Europe and Asia came under pressure).

This pricing logic implies an extremely dangerous assumption—that the market believes the war will be brief (a downward-sloping oil and gas futures term structure also confirms this).

Trivedi warned that once this blind optimism is disproven and energy prices prove to be persistent, the market will be forced to sharply reprice global growth and corporate earnings downward. At that point, “growth downside” will become the second shoe to drop. Under this recession trade logic:

1. Stock markets in developed and emerging markets, which have held up relatively well so far, will face significant selling pressure;
2. Copper, the Australian dollar, and other cyclical assets will face heavy selling pressure;
3. The hawkish pricing of front-end yields will reverse;
4. The Japanese yen (JPY) will replace the US dollar as the ultimate safe-haven currency in a environment where both stocks and bonds are declining.

The Middle East and North Africa (MENA) region has been among the first to feel the economic chill. According to Goldman Sachs MENA economist Farouk Soussa, Gulf Cooperation Council (GCC) countries are losing approximately $700 million daily in oil revenue; a two-month disruption would result in total losses nearing $80 billion. Non-oil GDP declines in countries such as Oman, Saudi Arabia, and Kuwait could even surpass levels seen during the 2020 COVID-19 pandemic. Amid capital flight and a rush to safety, the Egyptian pound (EGP) has become the worst-performing frontier market currency since the outbreak of hostilities.

The central variable in this epic crisis is no longer the firepower unleashed by U.S. forces, but the navigation schedule of the Strait of Hormuz.

Although Trump and senior officials in his administration, such as Energy Secretary Wright, have recently released optimistic signals to the market suggesting the conflict will end "within weeks," Goldman Sachs believes that Iran’s logic of survival, the United States’ political constraints due to its dependence on strait control, the natural ceiling on escort capabilities, and the absence of mediation conditions all point to one possibility: the duration of disruption will likely be longer than the "weeks" currently implied by market pricing.

Once this expectation is corrected, investors will no longer face just the continuation of an "inflation trade," but a shift toward a "recession trade." In Trivedi’s words, downside growth may be the next shoe to drop.