The central bank would be insane to hike this week, and I don’t believe that it will.
The energy shock that is overrunning Australia is going to shut down the economy in record time.
My sense is that a panic shutdown is already underway as Australians realise the Iran war will cut fuel supplies by 15% in a matter of weeks, and it could be much worse than that within two months.
If you are not taking immediate action, you are being reckless.
Attempts to reassure punters with strategic oil releases are largely bullshit. They only marginally reduce the shock.
And once the economic pain begins, those already rather uncoordinated releases are going to turn very quickly into export bans by anyone who cannot cover their own needs first.
The RBA needs to begin its pivot towards emergency cuts.
A shockingly large and sudden wave of unemployment is coming our way. Much of it will be Kurtzarbeit-style reduced hours and furloughed workers, not headcount cuts.
But in the short term, the economy makes no distinction between the two.
According to my calculations, Australia’s GDP will fall by about 6-7% if it loses 15% of its fuel.
Okun’s Law estimates that a 1% decrease in economic activity corresponds to a 0.5% increase in unemployment.
Therefore, even the best-case scenario of losing only 15% of our fuel would result in a near doubling of unemployment.
This is conservative, I’d say. Once we add some panic, it is likely to be higher even with fiscal support.
If we were to lose the full 30%+ of oil we import from the Middle East via Asian refiners, it would result in a depression-level GDP hit of -12-14% and unemployment rising to 12% within a quarter.
Worrying about short-term inflation, as this tsunami of pain flows in from all directions at once, would be about the stupidest case of central banking that I can recall.
