Joe Capurso, the head of the Commonwealth Bank, stated that the recent ceasefire is expected to alter the impact of the Middle East conflict on global growth and interest rates. The U.S. Federal Reserve is also likely to change course.
Capurso added that there was a reprieve to global supply chains & markets as ships that were already through the Strait of Hormuz delivered their cargoes. This situation is rapidly coming to an end. He was of the view that we’re really going to feel things from here. Even the 2-week ceasefire may not mean the war is over. Nor will there be a speedy return to full energy exports. This delay is due to the significant damage to the infrastructure.
Uneven impacts spanning economies
The effects of higher energy prices are being felt very differently across nations. This variation depends significantly on whether countries are energy producers or consumers. Capurso shared so on the latest episode of the CommBank View: Economics and Markets podcast.
A country like Canada, which is a major exporter of oil & gas, stands to actually benefit from higher prices, opined Capurso. However, if either Europe or Japan is heavily dependent on imported energy, it pays more. There is also a risk that one may not receive the volumes one is used to.
Pressures extend well beyond fuel. Fertilisers, extracted from gas, have also taken a hit.
Prices for those inputs have surged since the war began, added Capurso. Farmers exemplify an industry facing pressure from rising fuel and fertiliser costs.
Capurso asserted that with those costs having nearly doubled recently, margins are under pressure, with the increases likely to be passed on to the end consumer.
He opined that it may be inevitable that higher costs would flow through to food prices. Eventually, households may experience these higher costs when shopping at the grocery store.
China is positioned better than most
Capruso also shared that when it comes to the global impact of the Iran conflict, China stands out as an exception in several aspects.
China moves with larger reserves of oil, besides many other commodities. So China buys itself time to adjust, shared Capurso.
China is also the world’s dominant producer of renewable technologies. The critical minerals needed to manufacture renewable technologies, such as solar panels, wind turbines, and electric vehicles, are essential for this process.
Capurso inferred that this global oil shock will further accelerate the decarbonisation process. China is likely to be a large beneficiary of that.
Oil is primarily used to transport fuels. As such, higher prices are also likely to boost demand for electric vehicles. That’s another area in which China leads globally.
Pressure on households & expenditure
Capurso shared that in countries where governments allow fuel prices to fluctuate freely, higher costs are likely to burden household expenditure.
One cannot stop driving to their workplaces or taking children to weekend sports, added Capurso. People may tend to use a similar amount of fuel. So such behaviour may mean that they are just allocating more of their household budget towards them.
This leaves less income available for discretionary expenditure. Such changes may have flow-on effects across economies.
In places like Europe, it may hit the consumer-facing business quite hard, opined Capurso, particularly affecting sectors such as retail and hospitality that rely heavily on consumer spending.
Central banks may face tougher choices
The surge in energy prices is complicating the outlook for central banks. This is particularly so for the U.S.; it’s due to inflation risks re-emerging just as policymakers were preparing to look at cutting rates.
Capurso was of the view that CBA now expects some of the energy-driven inflation to spill into core inflation in the U.S. This would be alongside strong underlying demand.
Higher fuel prices act similarly to a tax on consumption. However, the U.S. economy is being supported by very strong investment, especially in artificial intelligence, added Capurso, which is driving innovation and productivity growth across various sectors. Those two forces in partnership mean inflation pressures are likely to persist longer than previously envisaged.
