Bendigo Bank April Economic Update

Ongoing conflict in the Middle East

“While this week’s announcement from the US of a two-week ceasefire with Iran has been warmly welcomed by markets, we will need to wait see how this de-escalation progresses. The crucial factor for us here at home remains the timing of when the Strait of Hormuz fully reopens,” Mr Robertson said today.

“Until then, not only will oil prices remain elevated but a range of other key industrial and commercial products will be impacted. Recent strikes on Qatar’s LNG facilities also means supply of by-products such as helium and fertilisers will be restricted even when shipping resumes.

“This all creates a domino effect markets continue to grapple with. For Australia, the impact on inflation is being seen via the cost of petrol and diesel, despite the Government’s fuel excise announcement and some state-based measures including free public transport.

“All energy crises come with the risk of stagflation - the unwelcome combination of inflation and a slowing economy, bordering on recession, so this event carries the same risks, depending on its duration,” Mr Robertson said.

“Globally, financial markets remain on the back foot with most stock indices around the world, including the ASX200, down around 6-8% from their record highs just over a month ago. While a pullback or even a short bear market has been widely expected given the size of the rally, its extent appears at the mercy of how quickly supply chains can normalise.

“Until then, downgrades to global growth are likely to be seen, prior to returning to a world where technology investment, especially in AI, has been the main driver of optimism in growth, asset values and productivity,” Mr Robertson said.

The latest jobs, inflation and consumer sentiment data

“Core inflation was still only 3.3% in February, and the March number, out later this month, will probably only be marginally higher than this,” Mr Robertson said.

“We also saw an uptick in unemployment to 4.3% in February with consumer confidence falling in the weekly ANZ Roy Morgan survey to 58.8 - its lowest level on record, as petrol prices rose sharply at the same time the RBA delivered its second, consecutive rate hike.

“While household spending held up reasonably in February, and spending on fuel will be higher in March, there is an expectation that discretionary spending will fall in Q2,” Mr Robertson said.

The build-up to the next RBA policy meeting

“The RBA has already hiked rates twice this year - an extraordinary change from market expectations in August last year, when rates were projected to fall below 3%,” Mr Robertson said.

“This change in direction, prior to the Middle East conflict, was initially driven by healthy outperformance in our labour markets and a strong rebound in business investment, but revealed capacity constraints.

“Ultimately, the RBA will need to decide in early May if the oil crisis and related disruptions will see supply and demand dangerously out of kilter, or if they can look through some of the data and not risk pushing the economy into recession.

“We predict a hold in May, but with a likely third hike for 2026 in August.

“All of this makes for a fascinating, but challenging environment, for the federal budget in which fiscal policy will be in focus on 12 May,” Mr Robertson concluded.

David Robertson unpacks the implications of the war in the Middle East, the latest ABS data the RBA’s upcoming May meeting.