Australians can expect higher petrol and gas prices and more volatile financial markets as a result of Russia’s aggression towards Ukraine but Australia’s economic rebound is unlikely to be derailed without a major escalation of hostilities, economists say.
Russian president Vladimir Putin ordered his nation’s troops into two renegade regions of neighbouring Ukraine on Monday (local time).
In response, investors trimmed their exposure to riskier assets. Stock markets in Asia fell, with Australia’s benchmark ASX200 index ending down 1%, while equivalent gauges in Hong Kong earlier lost as much as 3% and Tokyo’s 2%.
Oil prices rose 2.8% and touched seven-year highs on Tuesday. Saul Eslake, an independent economist, said rising crude costs were the most obvious initial effect of Russia’s actions against Ukraine.
“The world might assume that Russian oil will not be available to the market either because the Russians choose not to make it available or the West chooses not to buy it or in some other way impedes the trade in oil,” Eslake said.
Local petrol prices are already at record highs, reaching a national average of $1.791 cents per litre in the week to 20 February. In New South Wales on Tuesday, prices were averaging $1.816 a litre for E10 petrol, while in Melbourne E10 was $1.727 a litre.
As investors become more jittery, the Australian dollar also tends to fall against the US dollar, Eslake said. Since commodities are typically priced in the US currency, the price of oil in local terms will also be higher, once the delay of about a week feeds through.
Gas prices may also increase. While most of Australia’s liquefied natural gas (LNG) exports are based on long-term contracts to Asian customers, there may be a spike in regional prices if Qatar – the world’s second largest LNG exporter behind Australia – diverts shipments to Europe to cover for Russian shortfalls, Eslake said.
Gas’s share of Australia’s electricity market has been declining as renewables push out fossil fuels. Still, to the extent gas sets electricity prices, a higher cost of that fuel would also translate into higher wholesale power prices.
However, Gareth Aird, head of Australian economics at Commonwealth Bank, said the turmoil in Europe was unlikely to have a material impact on the national economy beyond the short-term fizz in financial and commodity markets.
“In terms of what is going to be driving the macro Aussie economy this year, [the European tension] is not going derail that,” Aird said. The drivers include the tight labour market, households loaded up with savings, and rising inflation and wages.
“The story of the Aussie economy is pretty much locked in this year and that stuff overseas won’t impact our domestic conditions,” he said.
Eslake agreed, adding he does not believe the Ukraine situation “will have any impact on the Reserve Bank’s thinking about the timing or magnitude of rate increases”.
The Commonwealth Bank predicts the Reserve Bank of Australia will lift its official cash rate from the record low 0.1% in June. Financial markets have lately pared back expectations of when the first rise will occur but still predict about one percentage point of increases this year.
The release of the ABS’s December quarter wage price index figure on Wednesday will likely underscore the dominance of local factors on the economic outlook, Aird said.
“We think we’ll see an acceleration in wages growth,” he said. In the September quarter, wages rose 0.6% and were 2.2% higher over the year.
We’re predicting 0.8% [December quarter WPI], the consensus is 0.7%, and the RBA’s implied profile is around 0.6%,” Aird said.
While the differences may appear small, they will be closely watched by financial markets, he said. The reserve bank will also be looking at two consumer price index figures before it decides to move on rates, with the first of these likely to be “a red hot print”, Aird said.
Card spending data released on Tuesday for the week ending 18 February showed a rebound in spending after a small fall the previous week, the Commonwealth Bank said.
“There are further signs that the economy continues to normalise as new Omicron cases fall. Spending in‑store and spending on services both continued to trend higher over the week,” the bank said.
Extracted in full from: Australian petrol price hikes and market jitters set to continue as Ukraine crisis worsens | Australian economy | The Guardian