Ukraine conflict puts recovery at risk

Treasurer Josh Frydenberg has warned an escalation of hostilities between Russia and Ukraine could result in higher energy costs and significantly hit the global economic recovery.

Global oil prices are already heading towards $US100 a barrel on the risk of all-out war, which has sent Australian petrol prices soaring to record highs in recent weeks.

“The knock-on effects for the global economy could be quite significant,” Mr Frydenberg told reporters in Adelaide on Tuesday, noting energy prices are on the rise.

“We’ve already seen the economy globally and in Australia recovering strongly. This would be a setback to that recovery. It would dent confidence, damage international equity markets and it would see the price of energy, globally, go higher.”

Concern about the inflation outlook in Australia is having a dampening impact on consumer confidence as petrol prices continue to scale new heights.

The ANZ-Roy Morgan consumer confidence index – a pointer to future household spending – fell 1.4 per cent, despite the easing of COVID-19 restrictions in parts of the country and the reopening of international borders.

The survey’s inflation expectations index rose 0.1 percentage point to 5.1 per cent, its highest level since December 2014.

“With petrol prices at record highs during the past few weeks the lift in inflation expectations is not surprising,” ANZ head of Australian economics David Plank said.

“The expectations of higher inflation might have had a dampening effect on overall sentiment.”

The Australian Institute of Petroleum said the national petrol price average in the past week rose by a further 2.2 cents to a record 179.1 cents per litre.

Commonwealth Securities chief economist Craig James estimates the average Australian household is now spending a record $250.74 a month on petrol, up $67 over the past year.

While inflation in Australia is already elevated and the unemployment rate has fallen to a 13-year low – and heading lower – the Reserve Bank says it is prepared to be patient in lifting the cash rate.

It has singled out subdued wage growth as a key reason for this patience.

“The RBA expects wages growth to reach the ‘magic’ three per cent per annum figure in the June quarter of next year,” St George chief economist Besa Deda said.

“We think it will be reached around one year earlier, necessitating the need for the RBA to start raising rates in August.”

The December quarter wage price index is due on Wednesday, and Ms Deda said a strong result may raise expectations of an even earlier move in rates.

Mr Frydenberg earlier told Australian businesses they shouldn’t expect too much help from the federal government when he hands down his pre-election budget on March 29.

“Our way out of this crisis is not through more stimulus, but through confidently moving towards normalised economic settings,” Mr Frydenberg told Business SA/Australian Chamber of Commerce and Industry breakfast briefing.

“We must let businesses get back to business.”

 

Colin Brinsden, AAP Economics and Business Correspondent
(Australian Associated Press)

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