Top forecaster’s dire prediction if Iran war drags on
One of Australia’s leading economic prophets has made a dire prediction if the war in the Middle East is not resolved soon.
HSBC chief economist Paul Bloxham predicts the Australian economy will contract in the June and September quarters if oil prices rise to US$140 per barrel and remain above US$100 per barrel until 2026.
It would mean the country’s first recession since the early 1990s, barring the Covid-19 pandemic, and what Paul Keating called “the recession we have to live through”.
In the “ugly scenario” envisioned by Mr Bloxham, higher inflation for longer periods as a result of higher oil prices and higher interest rates eats away at household income and reduces consumption.
Unemployment jumped to 5.5 percent as the Central Bank, fearing rising inflation expectations, increased interest rates twice more.
“Clearly, we see tougher times ahead,” said Mr Bloxham, who was previously crowned Australia’s best economic forecaster by the Australian Financial Review.
“It’s unclear how difficult it is.”
Federal Reserve governor Michele Bullock recently warned that a recession could be possible if inflation becomes too difficult to control.
HSBC’s base case is less dire than the worst-case scenario, with the unemployment rate rising to 5 percent from the current 4.3 percent.
However, this result depends on the Middle East problem being resolved at some point and oil prices falling.
In this case, it was estimated that the Australian economy would contract for only one quarter and the RBA would increase interest rates once again.
Other forecasters also see some relief in oil prices over the next few months but are beginning to accept similar doomsday scenarios if the war drags on.
Economists at the Commonwealth Bank have produced a downside scenario in which the benchmark oil price would reach US$150 per barrel and inflation would rise to as high as 6.4 per cent by June.
Brent crude oil futures rose 4.8 percent to above $112 a barrel over the weekend as Iran-backed Houthis threatened to shut down shipping in the Red Sea and the market braced for a longer conflict.
Westpac raised its interest rate forecast to a further three increases from one, given expectations that the conflict will last longer and early signs that oil costs are weighing heavily on consumer prices across the economy.
“This change reflects the (previously) longer disruption in fuel supplies and slower recovery, with the Strait of Hormuz remaining closed for eight weeks and traffic only slowly recovering thereafter,” said Luci Ellis, the bank’s chief economist.
“This also reflects the surprisingly rapid migration of higher fuel and other oil-derived product prices to other prices in Australia.”
Dr Ellis said the government’s decision to halve fuel duty on Monday had lowered the headline inflation forecast in the near term, but only pushed the 5.4 per cent peak to the late June quarter.
David Rumbens, partner at Deloitte Access Economics, said the energy shock ushered in a new damaging business cycle for firms already struggling with rising inflation before the war.
“Australia’s economy is running on empty,” he said in his business outlook report published on Monday.
“Higher fuel prices and the local economy struggling to contain inflation with reasonable economic growth rates are different aspects of the supply crisis story.”
Dr Ellis said the forecasts were likely to be overly pessimistic and that fuel stocks were recovering faster than current assumptions.
Australia’s Associated Press is the beating heart of Australian news. AAP is Australia’s only independent national news channel and has been providing accurate, reliable and fast-paced news content to the media industry, government and corporate sector for 85 years. We inform Australia.
