Australia faces ‘sharp recession’ if US escalates war
US President Donald Trump’s threat to send Iran “back to the Stone Age” shook the stock markets.
If it does this, Australia risks falling into recession.
In a protracted war scenario modeled by Oxford Economics Australia, the country’s gross domestic product would contract by 0.3 per cent in the June quarter and fall a further 0.8 per cent in the three months to September.
This would be Australia’s sharpest economic slowdown, excluding COVID-19, since the early 1990s.
Oxford Economics’ basic forecast is that the war will last two months; This means the Strait of Hormuz will reopen to ships carrying oil, gas, fertilizer and other important commodities at the end of April.
“But opportunities for de-escalation are shrinking and there is a risk of a longer-lasting conflict,” Oxford Economics Australia economist Harry McAuley said in a report on Thursday, shortly after Mr. Trump’s hawkish televised first speech.
In a prolonged war scenario, with shortages of energy products, oil prices will remain above $150 per barrel for four months and global inflation will approach 7.7 percent.
The benchmark crude oil price had not yet surpassed US$120 per barrel at the time of the conflict, but rose five per cent to US$105 per barrel after Mr Trump’s speech.
The ASX200 fell 1.06 per cent.
Investors saw little in Mr. Trump’s speech that suggested the Strait of Hormuz might open any time soon.
Commonwealth Bank senior economist Ryan Felsman said Australia was highly exposed to the global oil shock because it was a net energy exporter but imported about 85 per cent of its petrol, diesel and jet fuel supplies from abroad.
Australia is more reliant on diesel than most major economies, partly due to its vast geography where trucking requires a larger share and the large share of mining and agriculture in the economy.
“Energy-intensive agriculture, transportation, construction and mining sectors could be hit hard by persistent fuel shortages and rising input costs,” Mr. Felsman said.
Australian industries will be hit by weak economic activity as well as being hit by higher input costs.
CBA continues to expect the Central Bank to raise the cash rate again in May to beat inflation expectations.
NAB economist Michael Hayes also forecast a 25 basis point increase in May, driven largely by higher domestic inflation pressures and a still-tight labor market.
Job postings rose 2.7 per cent to 338,000 in the three months to February, the Australian Bureau of Statistics reported on Thursday; This is the highest level in the last 12 months.
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