Company Interview / Shane's View: global  “stagflation” scenario

Rising oil prices have sparked fear of a global  “stagflation” scenario through two channels. One, higher  commodity prices (with oil up to US$150/bbl in case of a prolonged war) and supply disruption could raise household energy costs and manufacturing input costs, while reducing households demand for discretionary consumption; and two, higher geopolitical risk and economic uncertainty will force households  and businesses to delay big purchases, holding back investment plans while adopt higher borrowing costs. 

Australian exports revenues could also be impacted given lower global trade.

Where to go from here? While there seems to be no end in sight as President Trump indicated that he was willing to fight for several more weeks using larger strikes and the Iranian leadership remained defiant, our base case is for Trump to find a way todeclare victory before significant energy disruption and higher inflation expectations become entrenched. 

US voters’ number one concern remains inflation and affordability, and with the midterm elections coming up, it is likely that Trump will take an off-ramp to limit consumer dissatisfaction with rising gasoline prices.

Meanwhile, Australian economic data has been rather strong lately, which explains the RBA Governor Michelle Bullock’s hawkish commentary on Tuesday. And most importantly, markets have repriced over comments about a “live” March meeting, in other words, the RBA does not need to wait for a quarterly inflation print to hike rates if necessary.

However, a stepdown in the pace of spending growth has already been confirmed with the latest household spending indicator. The rate hike in February has also already negatively impacted consumer sentiment and we expect spending to moderate further in the coming months. As a result, we see the RBA remaining on hold in the March meeting to wait and assess the impact of the rate hike (and talks of rate hikes) on the consumer.