Rising crude prices may push US towards recession, warns Moody's chief economist Mark Zandi

Amid the relentless rise in crude oil prices since the onset of the US-Iran war, investors have grown cautious, as oil-led price increases could impact the global economy, with economists now warning that higher crude oil prices could push the world’s largest economy closer to a recession.

Mark Zandi, Chief Economist at Moody's, warned that the US economy could tip into a recession within the next 12 months, as elevated crude oil prices add to pressures on an already soft labour market. A common rule of thumb is that two consecutive quarters of contraction in gross domestic product (GDP) indicate a recession.

In a series of posts on X, Mark Zandi flagged rising recession risks, noting that concerns had already been building even before the latest escalation in the Middle East.

“Recession is once again a serious threat. Even before the recent disconcerting events in the Middle East, our machine learning-based leading economic indicator model put the probability of a recession starting in the next 12 months at an uncomfortably high 49%. Behind the recent jump are primarily the weak labour market numbers, but almost all the economic data have turned soft since the end of last year,” he said.

Building on this, Zandi highlighted that the ongoing Iranian conflict and the sharp rise in oil prices could further elevate recession risks.

“It isn’t a stretch to expect the indicator to cross the key 50% threshold amid the Iranian conflict and the resulting surge in oil prices. Oil prices are an important variable in the model, and with good reason: every recession since WWII, save the pandemic recession, has been preceded by a spike in oil prices. Higher oil prices don’t do the same economic damage as in years past, as we produce as much as we consume, but consumers still get hit hard and fast, and they were already increasingly nervous spenders,” he added.

He also pointed out that despite growing signs of economic stress, economists remain cautious about explicitly calling a downturn.

“Despite mounting evidence that the economy is struggling and recession risks are high, economists will be loath to utter the word 'recession.' Many were sure a downturn was imminent in the wake of the Fed’s monetary tightening a couple of years ago and vocally said so but were wrong. However, if oil prices remain elevated for much longer (weeks and not months), a recession will be difficult to avoid,” Zandi said.

US economy expanded at a slower pace in Q4

The US economy expanded at a markedly slower pace in the final quarter of 2025 than previously estimated, as consumer demand and public spending turned out weaker than earlier projected.

The economy expanded at an annualised rate of 0.7% in Q4, marking the weakest performance since the contraction in the first quarter of 2025.

For the full year, GDP posted a 2.1% increase, one-tenth of a percentage point lower than the previous reading. In 2024, the economy grew at a pace of 2.8%.

US-Iran conflict drives Brent crude up nearly 40% in March

Amid fears of supply disruptions, Brent crude futures have jumped 39% in March so far, and earlier this month, prices even spiked to $119.50 per barrel, the highest level in four years.

Since the conflict erupted in the Middle East on 28 February, following joint attacks by the US and Israel on Iran, the flow of oil tankers through the Strait of Hormuz has all but stopped, cutting off a vital passageway through which roughly one-fifth of the world’s oil typically flows each day.

Major producers in the region, such as Iraq, Kuwait, and the United Arab Emirates, have also cut production as they are running out of storage space. Iran, Israel, and the US have all struck oil and gas facilities, worsening supply concerns. This has sent prices soaring, with dramatic swings almost every day.

An average of 20 million barrels per day of crude oil and oil products transited the Strait of Hormuz in 2025, accounting for around 25% of the world’s seaborne oil trade. Options to bypass the Strait of Hormuz remain limited.

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