Australian economy among world’s worst placed to weather Middle East shock: HSBC
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The news: HSBC chief economist Paul Bloxham has warned that Australia is in one of the worst spots globally to deal with the economic fall out of the US-Iran conflict.
What they said: “For the RBA, the challenge is that inflation was already too high, even before the Middle East conflict energy price shock,” Bloxham said in a note circulated on Monday morning.
He said this week’s first quarter inflation figures are expected to confirm that headline and trimmed mean CPI were “well above” the 2.5% target even before the full impact on the fuel price shock appeared.
“At the same time, the Australian economy has also been operating beyond its sustainable capacity and the jobs market has been tight,” he said.
“In our view, this combination makes Australia is one of the least well-placed developed economies to deal with the inflation shock that is arriving.”
The context: A suite of central banks are due to meet this week to decide on monetary policy. Bloxham said that “most” are in “wait and see” mode amid the crisis, given a negative supply shock can lift headline inflation but also weaken growth.
While “many G10 countries” have spare capacity in job markets and modest growth and therefore have a lower risk than others if they sit on their hands, this is not the case in Australia and New Zealand.
“In short, in Australia the risk that the short run spike in headline inflation gets quickly into inflation expectations is higher than elsewhere,” Bloxham said.
A tight jobs market means a higher likelihood than workers successfully demand high wages to seek to compensate for the higher inflation. A stronger economy means firms may have more pricing power, to pass on cost base increases.
“A lesson is that it is important to seek to have inflation close to target as often as possible, because that can give the central bank more flexibility in the face of the next (largely unpredictable) shock.”
He said the “slow road” taken by the RBA to get inflation back to target, compared to the higher and quicker rate rises overseas, means the economy is “now not very well placed to deal with the next shock”.
“As a result, we expect the Australian economy will need to have a downturn to get inflation to fall back towards the RBA’s target. The only real questions, in our view, are: how big that downturn will be and what drives it.”
The source: HSBC note
