Australian Recession Fears Mount as Oil Shock Fuels Stagflation Spectre

Recession Looms for Australia as Global Oil Shock Echoes 1970s Crisis

The escalating conflict in the Middle East has cast a long shadow over the global economy, with economists warning of unsettling parallels to the oil shocks of the 1970s. As the world grapples with the ramifications of this geopolitical tension, particularly concerning oil supply, Australia finds itself facing a precarious economic future, with a recession appearing increasingly likely.

The historical precedent is stark. In the 1970s, the Organisation of Arab Petroleum Exporting Countries (OAPEC) implemented an oil embargo against nations perceived as supporting Israel during the Yom Kippur War. This action triggered a dramatic surge in oil prices, leading to years of persistent inflation, economic stagnation, and ultimately, a widespread global recession that gripped developed economies throughout the 1980s.

More than a month into the current Middle Eastern conflict, the echoes of this past crisis are resonating strongly with policymakers worldwide. Economist Warren Hogan of EQ Economics has voiced concerns, noting the “haunting echoes of the 1970s” in the present situation. While Hogan doesn’t foresee Australia plunging into stagflation – a combination of high inflation and high unemployment – he acknowledges that a recession might be a necessary, albeit disruptive, catalyst for the Australian economy to recalibrate after recent shocks and stubborn inflation.

Responding to inquiries about whether Australia can navigate back to economic stability without a downturn, Hogan expressed a dim outlook. “It’s looking very unlikely,” he stated. He elaborated that the nation was already on an unstable economic footing prior to the current Middle Eastern crisis. “This is the worst possible thing that could happen to us, where we’re trying to reduce inflation with the minimum of disruption,” he added. Inflationary pressures were already mounting before the conflict, and now, the world is contending with what he described as “the mother of all disruptions.”

Hogan anticipates a “garden variety recession” in the coming years, which will inevitably bring its own disruptions. He also pointed to the evolving job market, influenced by the rise of artificial intelligence, as another factor contributing to potential changes in employment. Therefore, he believes there’s a “better than even money chance that we’ll have a recession of some type in the next two or three years.”

Should a recession materialise, Australia is unlikely to be an isolated case. Both Asian and European economies are considered highly vulnerable to the current oil price shock. Historian Niall Ferguson has also highlighted the historical pattern, noting that such oil crises almost invariably culminate in economic downturns. In a recent commentary, he cautioned readers to prepare, stating, “History shows most oil shocks lead to recession.” He further observed that crises in the Middle East invariably send shockwaves through the global economy, and the current disruption to Gulf oil supply is already of a greater magnitude than those experienced in the 1970s.

Could Australia Face Stagflation?

Regarding the specific prospect of stagflation in Australia, Hogan remains cautious but acknowledges the possibility of a scenario resembling it.

“I’m not convinced that stagflation, as defined by high unemployment and high inflation, is the likely scenario,” he explained. Instead, he suggested that a period of “high inflation and low economic growth for a few years” is a more plausible outcome. Hogan pointed to a fundamental shift in the labour market, characterised by a significant “labour shortage” with hundreds of thousands of job vacancies across the economy.

He anticipates that the advancements in AI and other technological disruptions will eventually lead to an increase in unemployment. However, the crucial challenge will be to facilitate the transition of economically displaced workers into new roles. Consequently, while “stagflation” might not be the precise terminology, the underlying theme of “low growth and high inflation” is already a discernible feature of the current Australian economic landscape.

A Call for National Unity in Crisis Response

In light of the escalating fuel crunch stemming from the Middle East, Australia’s national cabinet is convened for a second discussion on the matter. Leaders from states and territories, alongside business groups, are advocating for a unified national strategy to navigate this crisis, rather than a fragmented approach across different jurisdictions.

Andrew McKellar, Chief Executive of the Australian Chamber of Commerce and Industry, expressed a strong desire to avoid repeating the mistakes of the COVID-19 pandemic response. He recalled a period 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.” McKellar stressed the importance of a cohesive national plan to effectively manage the current fuel supply challenges.