Allianz Chief Economic Advisor Warns: Middle East Conflict Causes US Economic Recession Probability to Soar

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American economist and Allianz Group Chief Economic Advisor Mohamed El-Erian stated that increased conflicts involving Iran raise the likelihood of a recession in the United States, but this is not the only risk he is concerned about.

In an interview on Tuesday, the former PIMCO Chief Investment Officer said that rising oil prices, which could trigger a potential inflation spiral, are making a U.S. recession more likely.

El-Erian believes the probability of a recession in the U.S. has increased from about 25% to 35%. He pointed out that this increase is mainly driven by spillover effects from the U.S.-Iran conflict, but he added that another factor is also influencing his outlook.

Rising oil prices are causing an inflationary spiral, leading to demand shocks. The conflict has already pushed oil prices higher, with Brent crude hovering around $100 per barrel for over a week. El-Erian warned that rising oil prices could make inflation a structural problem for the U.S. economy, given the widespread use of oil and the broader supply chain disruptions caused by the war.

“The first phase is high inflation, which erodes purchasing power and increases costs for businesses. The second phase is slowing economic growth and rising unemployment,” El-Erian explained, adding that he considers this scenario the greatest risk facing the economy.

The risk of a “financial accident” is increasing. El-Erian noted that higher inflation could interact with various vulnerabilities in financial markets, such as recent surges in redemption requests in private credit, weak global government bond demand, and overvalued stock markets.

“Once a major financial accident occurs, it will tighten the financial environment, making credit unavailable. As a result, demand will ultimately decline,” he said.

“The longer the conflict persists, the higher the likelihood of a recession,” he added when discussing his recession forecast.

For weeks, markets have been worried about the impact of rising oil prices. Investors are currently experiencing a third consecutive week of rising crude prices, with no end in sight to the conflict. There are concerns that higher oil prices will push inflation up, burden consumers further, and lead more Americans to cut back on spending.

El-Erian stated that the result could be a “demand shock,” severely impacting businesses, leading to reduced spending and higher unemployment. Moreover, this shock could occur just as U.S. economic growth and hiring activity are already beginning to slow.

In recent months, El-Erian has been more outspoken about various risks in the markets and economy. Besides escalating inflation, he also pointed out contagion risks in the private credit sector, which is increasingly under scrutiny as investor concerns about liquidity grow and more asset management firms face redemption requests.