Goldman Sachs warns Russia’s war on Ukraine could plunge U.S. and Europe into recession

Inflation is at a 40-year-high. Energy prices are soaring. And now Wall Street is uttering the dreaded S-word—stagflation—or slowing economic growth amid a surge in prices. These macro headwinds are adding volatility to the global markets.

In successive client notes on Thursday, Goldman Sachs downgraded its growth outlook for the United States and for the European Union. Goldman analysts had particularly dire words for the latter.

“The Russia-Ukraine conflict has dented our previously optimistic views on Europe’s economic and asset market outlook. Largely due to the sharp increase in energy prices and the potential for additional supply disruptions, our Europe Economics team has revised down their baseline forecasts for 2022 Euro area GDP growth to 2.5% from 3.9%,” Zach Pandl, cohead of foreign exchange strategy, told investors.

Recession risk

Goldman is also blaming the Russian invasion of Ukraine for its souring outlook on the world’s biggest economy. It lowered its full-year real 2022 GDP growth forecast for the United States by 25 basis points, to +1.75%. That’s nearly a full percentage point below the consensus estimate, which could itself shrink should the war in Ukraine persist, Wall Street warns.

“This forecast implies below potential growth in 2022 Q1 and 2022 Q2 and potential growth for 2022 overall,” wrote Jan Hatzius, Goldman’s chief economist. “And we now see the risk that the U.S. enters a recession during the next year as broadly in line with the 20% to 35% odds currently implied by models based on the slope of the yield curve.”

After a volatile week in the markets, stocks in Europe were flat on Friday in early trading, while the Asian bourses were mostly lower ahead of the close there. Across the Atlantic, U.S. futures were dipping as well. All three major U.S. exchanges are at risk of finishing the week in the red. The big data point today: The University of Michigan index of consumer sentiment comes out before the bell.

Meanwhile, Brent crude continued its march higher, trading above $111 per barrel at 4 a.m. ET.

Elsewhere, crypto continues to sink.

Bitcoin hovered around $39,000, more than 6% off its high on Thursday. Yesterday’s consumer price index print of 7.9%, matching the fastest annual jump in prices since 1982, pushed crypto bulls to dump their digital assets. The selloff in Bitcoin and Ether in the past 24 hours has essentially wiped out the midweek rally in crypto, which was triggered by the White House’s landmark executive order on digital assets, a move that crypto adherents hope will lead to wider adoption and boost the overall market.

From stocks to crypto, risk assets are hard hit by global inflation, a situation that’s getting pounded by Russia’s war in Ukraine. Analysts see more pain ahead.

“The Russian invasion of Ukraine has added fuel to the inflationary fire, where supply-chain issues and commodity constraints will surely exacerbate pricing pressures in the near term,” said Peter Essele, head of portfolio management at Commonwealth Financial Network. “It’s quite possible that year-over-year inflation breaches the psychological benchmark of 10% by midsummer, causing a breakdown in confidence and hindrance to growth, particularly in more price-sensitive developing markets.”

Check out this Fortune must-read: “Tech investors are suffering the second stocks rout of the COVID pandemic—and Wall Street thinks it could get far worse”

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