The global shock brought about by the Russian invasion of Ukraine may have unforeseen consequences for the Australian economy, economists have warned.
The EU is racing to cut dependence on Russian gas and oil by as much as 80% this year – just one of the factors pushing crude oil to new decade-highs. The US and the UK banned Russian oil imports on Tuesday, sending West Texas crude prices towards $US130 a barrel.
Other commodity prices have soared, including wheat to all-time records, propelling the Australian dollar almost as high as 73.5 US cents – its highest in about three months – before paring gains.
Australia’s relative dependence among rich nations on commodity exports leaves it exposed to sharp swings in international markets. That reliance aided the nation during the debt-fuelled government spending binge to ensure post-Covid recoveries, and it may assist Australia again in the scramble to find non-Russian sources of commodities from energy to metals to food.
The International Monetary Fund (IMF) last weekend warned price shocks would “have an impact worldwide, especially on poor households for whom food and fuel are a higher proportion of expenses”.
“Should the conflict escalate, the economic damage would be all the more devastating,” the IMF said. Sanctions on Russia would also “have a substantial impact on the global economy and financial markets, with significant spillovers to other countries”.
More costly commodities would be noticed at Australians’ kitchen tables and when they head to the service station – assuming they don’t drive an electric car – with prices predicted to jump to as much as $2.50 a litre for petrol.
Chris Richardson, a senior economist at Deloitte, said Australian motorists were “on the wrong side of oil prices that have roughly risen $30 (AU$40) a barrel” since Russia’s invasion last month.
Depending on the blend of oil, prices are at their highest in as many as 14 years as investors weigh up the effects of potential sanctions on Russia. The country accounts for 13% of oil exports and 9% of gas, according to Rabobank.
Petrol prices are already back up near their recent highs in Melbourne, but are still well off them in other major cities, the Australian Competition and Consumer Commission said.
“With the kind of spot [crude] prices that people have been talking about the last few days, you’d expect to see prices getting up to about $2.50 a litre,” said Graeme Bethune, the chief executive of consultancy EnergyQuest.
So far, higher global gas prices have not yet had a big impact locally. “They’ve gone from … $8 to $10 [a gigajoule], not to $50” as in some overseas markets, Bethune said. “So we’ve been fairly insulated so far.”
But energy production has little scope to increase in the short term in response to the higher prices, he said.
Food prices will be elevated too, not least because Ukraine is one of the world’s biggest exporters of agricultural products. According to Rabobank, Ukraine accounts for 12% of global wheat trade, 16% for corn and 18% for barley.
Sanctions on Russia may also affect its exports. Ukraine and Russia together account for 60m tonnes of wheat exports annually, which is more than twice the size of Australia’s record wheat crop last year.
Australian farmers’ windfalls will be moderated by higher input costs, such as fertiliser and diesel. Ongoing disruption from large floods over parts of eastern Australia will also curb gains, but at least the La Niña event that has contributed to the heavy rain has peaked, Rabobank said.
Catherine Birch, a senior ANZ economist, said recent surveys show consumer and business confidence are affected more by local events than by the war in Ukraine so far.
Household inflation expectations are at the highest since 2014, with petrol prices already a key factor, Birch said. New Zealand and the US have seen confidence undermined by higher inflation, and while Australia’s is lower, it’s worth watching.
The ongoing flooding in eastern Australia could also boost inflation, not just through high food prices as production and transport chains are strained, but also by adding to higher construction and labour costs. Order books for construction were already bulging before the floods, she said.
The group chief economist for NAB, Alan Oster, said Australia’s economy would probably shrug off any near-term effect of the war on consumer or business confidence, and was relatively well placed.
“Our labour market is much stronger … US is still 2m jobs below where they started from [pre-Covid],” Oster said. “We still are in the middle of our inflation target, not [double it] as per the US, and wage issues are less.”
NAB on Tuesday brought forward the timing of when they expect the Reserve Bank to start raising the official cash rate to August from a previous forecast of November.
“That is purely based on the forecasts we see happening in wages and prices, and much lower unemployment than the RBA expected,” Oster said.
“Russia is not relevant other than the effects on uncertainty and may be a reason why the RBA waits longer.
“Higher inflation from oil and gas and wheat is from a once-off shock. Most central banks will ignore that.”
Oster expects energy importers such as Europe and Japan to be particularly hard-hit, shaving global growth by half a percentage point this year to about 3.7% “provided that [the war] can be solved in the next six months”.
One small upside of the economic turmoil may be in federal budget revenue for the treasurer, Josh Frydenberg.
“Chances are that the federal budget is a net beneficiary simply because of what’s happening around coal and gas prices,” Richardson said.
“Australia sells about $80bn a year of coal and gas to the world,” he said. The tax take will rise roughly $2bn for every 10% rise in prices.
Iron ore may provide an even bigger fiscal fill-up, with prices lately soaring to six-month highs because of surging Chinese demand.
Australia will get “rather more dollars” for the budget than from energy price gains because of the low estimates used by treasury in its earlier forecasts, Richardson said.