Updated ,first published
The Australian economy is showing early signs of stagflation, with soaring oil prices and the Reserve Bank’s latest interest rate rises increasing business costs and driving consumer confidence to its lowest level on record.
As Treasurer Jim Chalmers said the economy would be buffeted by the war in Iran, the ANZ-Roy Morgan weekly measure of consumer sentiment dropped 5.4 points over the past seven days.
The measure, released on Tuesday morning and the first since the RBA lifted the cash rate last week, has fallen 20 per cent since the conflict began. It is at its lowest level since the measure was created in 1973 during the first oil shock.
Consumers are expecting inflation to soar to 6.9 per cent, while the number of people who believe it is a good time to buy a large household item is in freefall.
A separate measure of the business sector, the S&P Global manufacturing index for Australia, dropped into contractionary territory with private output falling for the first time since the end of 2023, while they lifted prices to consumers at their fastest pace in more than two and a half years.
S&P Global Market Intelligence economist Eleanor Dennison said the report showed the Australian economy was weakening even as price pressures were increasing.
“These flash data provide the first look into the extent to which war in the Middle East has rippled through the global economy,” she said.
“March’s data show that Australian companies are feeling less optimistic towards the year ahead, with cost inflationary pressures at their highest in more than three years, faltering demand and supply chain disruption.”
ANZ economist Sophia Angala said the sharp fall in confidence was largely due to the lift in oil prices and the Reserve Bank’s decision last week to push official interest rates up to 4.1 per cent.
“With very large increases in petrol prices through March, inflation expectations rose to an all-time high last week,” she said.
“Household confidence in their current and future finances weakened sharply, as did the ‘time to buy a major household item’ subindex, which is at its lowest since late March 2020 when pandemic lockdowns were announced.”
Treasurer Jim Chalmers, in a speech to the nation’s business leaders in Canberra on Tuesday night, said the large drop in consumer confidence was inevitable as Australians responded to fuel security questions and soaring petrol prices.
Treasury modelling has shown that if oil remains above $US100 a barrel through the first half of this year, inflation could spike above 5 per cent. If it climbs above $US120, inflation could climb above 5.5 per cent while it would “scar” the economy until at least 2027.
Chalmers said the war would make the country’s inflation challenge more difficult, and confirmed that Treasury had modelled a third scenario with even higher oil prices for longer, as the first two models may yet prove too conservative.
“We are well-placed and well-prepared, but we will be buffeted,” he said.
“Two things matter most here, how long the war lasts but also how long it takes to get the global economy back on track after it ends.”
But shadow treasurer Tim Wilson said Chalmers’ agenda was to blame for the collapse in confidence.
“Australians are living in fear of Jim Chalmers’ active inflation agenda,” he said.
“Until now the problem with the government’s economic agenda was crushing Australians’ attempts for hard work to pay off, now they’re increasingly worried the government is working against them getting ahead.”
The measures of consumer confidence and business activity were released after the Council of Financial Regulators, which is made up of the Reserve Bank, federal Treasury, the Australian Prudential Regulation Authority and the Australian Securities and Investments Commission, expressed concern about the war’s impact on the nation’s financial system.
“While direct exposures of the Australian financial system to the Middle East were limited, a further deterioration of the geopolitical environment could heighten risks to financial stability and requires continuing vigilance,” the council said in minutes of its Monday meeting.
“Council members observed that the Australian financial system has established a good degree of resilience and is well-placed to navigate a high-risk international environment.
“It is important, however, that banks maintain strong levels of capital and liquidity, in the context of wider council-industry efforts to strengthen crisis preparedness arrangements.”
There are concerns that the RBA’s most recent rate rise will weigh heavily on some borrowers.
The council warned the nation’s banks that they needed to maintain high lending standards.
“Most borrowers in Australia are in a solid financial position and remain able to manage increases in cost pressures, though some will face growing challenges,” it said.
“The council agreed it would be important for lending standards to remain prudent, given the backdrop of high household indebtedness, recent strong credit growth and reports of strong competition among lenders.”
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Shane Wright is a senior economics correspondent for The Age and The Sydney Morning Herald.Connect via X or email.
