00:00President Trump is insisting that the opening of the Strait of Hormuz be part of any Iran peace deal
00:05as he escalates threats to destroy key infrastructure if his terms aren't met before a Tuesday deadline.
00:11Our next guest says a prolonged war scenario would send Australia's economy into a sharp recession.
00:17Excluding the pandemic, this would be the sharpest quarterly fall since the early 1990s.
00:23Let's get to Harry McCauley, Australia economist at Oxford Economics.
00:27Harry, important to emphasise I think this is among the worst case scenarios.
00:31Where do you place the likelihood of a recession in Australia and what are your projections for growth and inflation?
00:38Yeah, exactly. As you stressed, this is our worst case scenario.
00:43We don't have a probability that we're assigning to this, but we think under this scenario,
00:48which would essentially see the Strait of Hormuz being closed effectively until September,
00:54would lead to back-to-back quarterly falls in GDP in the June and September quarters.
01:03And when we look at the year-on-year growth, by the end of 2026,
01:08we would see GDP in Australia shrinking by 0.2%.
01:14Now, domestically, the government's faced a lot of criticism here for not having enough fuel stockpile.
01:20Do you feel that criticism is warranted?
01:22Does the country need more refining, more oil stockpiles,
01:25or does the infrequency of these sorts of shocks just make it not really cost-effective?
01:32That's a tricky one.
01:34The domestic oil reserve quantities haven't really changed for a number of years.
01:40They've been sitting at around 30 days of inventories for quite some time now.
01:44I suppose a shock like this really highlights some of the issues that can arise
01:50from something like the Strait of Hormuz being closed.
01:54But, of course, holding more inventories means a cost to the government.
01:58So, I think it's more a question of politics rather than economics.
02:02So, I'll leave it to the politics experts.
02:04But what I can say is that Australia is incredibly reliant on fuel imports from Asia,
02:11with about 90% of our fuel imports coming from Korea, Malaysia, Singapore, and the like.
02:18And we're seeing that these countries are reliant for about 75% of their crude imports
02:25from the Middle East, most of which has been closed due to the Strait of Hormuz being effectively shut.
02:32So, this is really highlighting some of the challenges in terms of our fuel supply chains
02:38and kind of their resilience in Australia.
02:43So, you also note that the impact on Australia could be quite uneven,
02:48depending on the state, depending on the region.
02:50And the longer this drags on, where would you anticipate the pain is worst felt
02:55and which parts of the country might not suffer so badly?
02:59Absolutely.
03:00When we look at an industry-by-industry split, the first-order effects are already being felt
03:06and will continue to be felt most acutely in industries such as transport, warehouse, and postal services.
03:14When you look at a total fuel usage and a sort of return on fuel inputs metric,
03:20it is by far the most exposed industry in Australia.
03:24Mining is a close second.
03:25But then when we break it down a little bit further and we look at the expected impacts
03:30at a state and territory level, we find that export-oriented, commodity-focused economies
03:36are likely to feel the pinch more than others.
03:38So, our analysis shows that when we compare the expected GSP pathways for Western Australia
03:46and Northern Territory relative to our baseline assumptions for this year,
03:51they will be the most affected.
03:54In fact, we'd see an expected contraction in GSP in five of eight states and territories,
04:03the ACT being the outlier, where we would expect to see some moderate growth.
04:09But it is a territory that isn't really exposed in the same way as others to heavy industries
04:15that are so reliant on diesel and fuel inputs in terms of its economy.
04:23How is the Australian household doing right now?
04:26And when can we expect them to take the bigger brunt of, of course, inflationary pressures rising?
04:33Australian households were already suffering realistically prior to the crisis.
04:39We've seen inflation in Australia well above target for quite a while now.
04:45And not that there's ever a good time for a shock like this to happen,
04:48but it couldn't really have come at a worse time.
04:50We already saw the RBA moving prior to the straits being closed and hiking in February.
04:57We expect to see this, to see another hike coming through in May,
05:03regardless of whether the strait reopens, you know, tomorrow or the crisis goes on for even longer.
05:13We're seeing inflationary pressures starting to build already.
05:17Of course, the most obvious is at the bowser.
05:20Those first-order effects are being felt by consumers and businesses
05:24that are exposed to unleaded and diesel inputs.
05:29But we're also starting to see reports of some of these fuel costs being passed through
05:34from, say, transport to businesses.
05:37And businesses, in turn, will pass these through to the sticker prices on the shelves.
05:42So we will see, in the coming weeks and months, updated prices for consumers in the shops.
05:50What about food costs, given that we know fertilizers, the agriculture sector, is also going to get hit?
05:57Absolutely.
05:57The agriculture sector is in a really tough spot.
06:00Not only is diesel a necessary input for, say, running machinery and tractors,
06:07fertilizers is a massive input in the actual process of production.
06:13So there's a sort of double whammy for agricultural producers and exporters,
06:21in so much as they have higher input costs at a fuel level.
06:25But we're also expecting to see fertiliser costs rising with 20% to 25% of Qatari gas
06:33and fertiliser production offline until the straits reopen.
06:38So farmers are going to have a really tough decision in the coming season,
06:42whether they absorb the higher costs and continue to fertilise,
06:46or they just decide to simply accept lower yields and not fertilise.
06:51This will be reflected in the food costs.
06:55Sorry, Paul.
06:56Harry, to your point, we're about a month out from the Australian budget.
07:00Do you anticipate to see any measures to support some farmers,
07:03other sectors of the economy as well?
07:05What would be appropriate?
07:08Yeah, that's a good question.
07:10We don't really have a view on where these kinds of broad-based measures might come,
07:15but we have already seen some movements by the federal government,
07:20and most notably the fuel excise reduction for three months,
07:25as well as zero-interest loans for businesses that are suffering.
07:31As you said, we've got another month or so until the budget will be released,
07:35so there is certainly some thinking to be done by the Treasury Department
07:41in terms of how they might be able to pass on some measures
07:46to support some of these key industries in Australia.
07:49All right.
07:50Harry McCauley, Australia economist at Oxford Economics,
07:53thanks so much for joining us today.
07:55And we have more on Australia ahead every Tuesday,
07:5710.40 a.m. if you're watching in Sydney,
08:008.40 a.m. in Hong Kong.
08:02And we have more ahead on the Asia trade.
08:04This is Bloomberg.
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