Markets 
Reserve Bank governor Michele Bullock believes the country will avoid a recession even if oil prices continue to climb, while rejecting even the notion that Australia is facing a period of stagflation.
On a day that US President Donald Trump warned that the Strait of Hormuz could remain closed until September, the governor used a Senate committee hearing to argue that despite the economic headwinds caused by the war, the economy was still likely to grow over the coming years.
The war has delivered a global shock to growth and inflation, with central banks around the world either lifting interest rates or signalling their intentions to tighten monetary policy. The Reserve Bank itself has lifted interest rates three times this year, although financial markets believe it will not move at its June and August meetings.
The OECD this week sliced its global economic outlook, forecasting growth of 2.8 per cent this year after previously tipping 3.4 per cent. If the war delivers a prolonged hit to oil supplies, the Paris-based think tank predicted growth could slip to just 1 per cent.
But Bullock said while growth in Australia was likely to ease this year, the economy would continue to expand even if oil prices pushed higher.
“While these are challenging conditions, the economy is still expected to grow, albeit modestly, even under these scenarios where oil prices are significantly higher than recent levels,” she said.
“Investment has been a bright spot recently and growth is expected to continue in sectors of the economy with strong structural tailwinds, such as software, data centres and renewable energy.”
Some analysts have raised concerns the country could enter a period of stagflation. The last extended period of stagflation was the 1970s oil shock, during which growth slowed, unemployment increased and inflation soared to double-digit levels.
But Bullock said she did not see stagflation here or overseas.
“I don’t think there’s anyone who thinks there is stagflation going on around the world at the moment,” she said.
“I wouldn’t even use the term stagflation in the current circumstances. Stagflation [is about] a prolonged period of high inflation and very poor growth and poor employment outcomes. We’re not in that situation.”
Treasury secretary Jenny Wilkinson, who sits on the Reserve Bank committee that sets interest rates, did caution that the situation in the Middle East could deteriorate.
She told the same committee that Australia’s three major trading partners, China, South Korea and Japan, had strong supplies of oil, while other parts of the region were facing shortages that may force them to introduce usage restrictions.
But the longer the war continues, the greater the risk that countries will run down their supplies.
“The impacts of the closure of the Strait of Hormuz have been cushioned, to some extent, by a drawdown of global inventories,” Wilkinson said.
“But there are limits on the extent to which stocks can continue to be drawn down at current rates before operational stress levels increase. This also creates the risk of higher prices in the future if the current disruption continues, even if it doesn’t escalate.”
New trade figures released by the Bureau of Statistics on Thursday highlighted the disruption being caused by the war.
In April, the country imported $8.2 billion worth of crude. It was a 64 per cent increase on March and 134 per cent up on April last year.
It was the single most expensive month for oil imports and well above the previous record, of $5.9 billion, that was recorded in the early stages of Russia’s invasion of Ukraine.
While Australia was paying for pricey petrol, overseas investors and jewellers were buying record amounts of Australian gold. Exports of gold eased slightly in April to $7 billion.
That was still the third-highest amount on record, after $7.9 billion in February and $7.4 billion in March.
Through the first four months of this year, Australia has exported $28.3 billion worth of gold. Over the same period last year, gold exports were worth $18.7 billion, while in those months in 2020 they were just $8 billion.
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Shane Wright is a senior economics correspondent for The Sydney Morning Herald and The Age.Connect via X or email.From our partners
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