The Iran war has unleashed a cascade of consequences that will shape Australia's future, according to leading economist Shane Oliver. The conflict in the Middle East has triggered a fuel shock, exacerbating a decade-long trend of shortages, rising prices, and inflation. This crisis is the latest in a series of global shocks, including the GFC, Eurozone debt crisis, Covid-19, and the Ukraine war-led inflation spike. The war's impact extends beyond the immediate economic turmoil, with Mr. Oliver identifying nine key longer-term consequences.
One of the most significant effects is the worsening cost-of-living crisis. Prices have already increased by 5-6% more than wages over the last five years, and this trend is expected to continue. The natural response to this crisis might be to rely on government intervention, but Mr. Oliver warns that this approach has its limits. He believes that the only way to resolve the problem is to boost productivity, which was a key focus of the budget but may now be overshadowed by cost-of-living measures.
The war has also heightened geopolitical risks and increased the likelihood of a new generation of terrorists. It has led to calls for Australia to become more self-sufficient in oil production, with the potential to build new oil refineries. However, Mr. Oliver points out that this shift towards insularity will come at a cost, both financially and in terms of economic growth. The improved living standards of the 1990s and 2000s, driven by rapid economic growth, may now be at risk.
The war's impact on living standards is further evident in the Westpac consumer sentiment report for April, which showed a 12.5% drop in consumer confidence, the lowest since the GFC. Job loss fears have risen to a 10-year high, and consumer confidence is at near-historic lows. Mr. Oliver suggests that the government's role in easing the burden on households is limited, and that the focus should be on boosting productivity to address the cost-of-living crisis.
The economist also highlights the challenge of returning to pre-crisis prices for commodities like oil. The Ukraine war shock saw oil prices halve, but they only returned to around $1.50 per litre, far from the pre-crisis level of $1.20. Mr. Oliver predicts that prices for fertilizers and other commodities will remain higher, even if there is some fallback. This trend will have a lasting effect on the Australian economy, making it more inflation-prone.
In conclusion, the Iran war has set in motion a series of events that will have long-lasting implications for Australia. The economist's predictions underscore the need for a comprehensive approach to address the economic challenges, including a focus on productivity and a careful consideration of the costs associated with increased self-sufficiency.
