The escalating tensions in the Middle East, which ignited the Iran war earlier this month, have cast a long shadow over the global economy, with economists drawing parallels to the disruptive oil shocks of the 1970s. Experts warn that the ghosts of that era, marked by soaring oil prices, rampant inflation, and widespread economic downturns, are now a very real and present concern for policymakers worldwide.
Echoes of the 1970s: A Lingering Threat
Shane Oliver, an economist at AMP, initially flagged the potential for a 1970s-style oil shock as the conflict unfolded. The historical precedent is stark: the Organisation of Arab Petroleum Exporting Countries (OAPEC) enforced an oil embargo against nations perceived as supporting Israel during the Yom Kippur War, triggering a dramatic surge in oil prices. This was followed by years of persistent inflation, stagflation, and a debilitating global recession that gripped developed economies throughout the 1980s.
Now, several weeks into the current conflict, these historical spectres are proving to be more than just theoretical concerns. Warren Hogan, the managing director of EQ Economics, stated that “there is certainly haunting echoes of the 1970s in all of this right now.”
The Unstable Path to Recession?
While Hogan doesn’t believe Australia is necessarily headed for a full-blown period of stagflation if the Iran war intensifies, he concedes that a recession might be an unavoidable, albeit painful, step to stabilise the Australian economy. Responding to a listener’s question on ABC’s RN Breakfast about whether the economy could find a stable footing without a recession, Hogan was pessimistic.
“It’s looking very unlikely,” he admitted. “Unfortunately, we were on an unstable path even before this shock coming out of the Middle East. This is the worst possible thing that could happen to us, where we’re trying to reduce inflation with the minimum of disruption.”
Hogan elaborated that inflation was already on an upward trajectory before the conflict, and the current geopolitical situation represents “the mother of all disruptions.” He anticipates a “garden variety recession” within the next two to three years, which will inevitably lead to changes in the job market, exacerbated by the increasing integration of AI. “So my answer would be, I think it’s a better than even money chance that we’ll have a recession of some type in the next two or three years.”
This potential downturn is unlikely to be confined to Australia. Both Asia and Europe are considered highly vulnerable to the ramifications of the current oil shock. Historian Niall Ferguson has also highlighted the historical pattern, noting in a recent essay that such oil shocks almost invariably culminate in recession. He warned readers to prepare themselves, stating, “History shows most oil shocks lead to recession.”
Could Australia Face Stagflation?
The question of whether Australia could enter a period of stagflation – a challenging economic state characterised by high inflation and high unemployment – remains a point of discussion. Money markets are currently pricing in a terminal RBA cash rate of 4.85 per cent, suggesting a likelihood of further interest rate hikes by the Reserve Bank this year. This, coupled with the prospect of surging oil prices, potential shortages, and even fuel rationing, places significant pressure on the Australian economy and its consumers.
Hogan expressed some uncertainty about a classic stagflation scenario but acknowledged the possibility of a situation that resembles it.
“I’m not convinced that stagflation, as defined by high unemployment and high inflation, is the likely scenario,” he said. “It could be high inflation and low economic growth for a few years. But we are in a very different world when it comes to the supply and demand balance for labour – that is, we are in a world of labour shortage. There are hundreds of thousands of job vacancies sitting in our economy.”
He suggested that while AI and technological advancements might contribute to rising unemployment, the critical challenge will be to transition displaced workers into new roles. Therefore, while “stagflation is probably not the right concept, well, not the right way to call it,” Hogan concluded that the underlying theme of “low growth and high inflation are already sort of part of the Australian economic scene right now.”
A Call for National Unity: Avoiding Past Mistakes
In light of the escalating fuel crisis stemming from the Middle East, national cabinet is set to convene to discuss the situation for the second time. State and territory leaders, alongside business groups, are advocating for a unified national strategy to navigate the crisis, rather than a fragmented approach across different jurisdictions.
Andrew McKellar, the chief executive of the Australian Chamber of Commerce and Industry, voiced concerns about repeating past errors, referencing the disjointed responses seen during the COVID-19 pandemic. “We don’t want to head back into that situation that we had a couple of years ago in Covid, where Queensland was doing one thing, NSW had a different approach, Western Australia cut itself off from the rest of the economy, the Victorian economy was locked down for over a year.” The call for a cohesive national plan underscores the desire to manage the current economic headwinds with greater coordination and effectiveness.
