RBA boss says economy can weather war and avoid recession

Reserve Bank governor Michele Bullock believes the country will avoid a recession even if oil prices continue to climb, while rejecting even the notion that Australia is facing a period of stagflation.

On a day that US President Donald Trump warned that the Strait of Hormuz could remain closed until September, the governor used a Senate committee hearing to argue that despite the economic headwinds caused by the war, the economy was still likely to grow over the coming years.

The war has delivered a global shock to growth and inflation, with central banks around the world either lifting interest rates or signalling their intentions to tighten monetary policy. The Reserve Bank itself has lifted interest rates three times this year, although financial markets believe it will not move at its June and August meetings.

The OECD this week sliced its global economic outlook, forecasting growth of 2.8 per cent this year after previously tipping 3.4 per cent. If the war delivers a prolonged hit to oil supplies, the Paris-based think tank predicted growth could slip to just 1 per cent.

But Bullock said while growth in Australia was likely to ease this year, the economy would continue to expand even if oil prices pushed higher.

“While these are challenging conditions, the economy is still expected to grow, albeit modestly, even under these scenarios where oil prices are significantly higher than recent levels,” she said.

“Investment has been a bright spot recently and growth is expected to continue in sectors of the economy with strong structural tailwinds, such as software, data centres and renewable energy.”

Some analysts have raised concerns the country could enter a period of stagflation. The last extended period of stagflation was the 1970s oil shock, during which growth slowed, unemployment increased and inflation soared to double-digit levels.

But Bullock said she did not see stagflation here or overseas.

“I don’t think there’s anyone who thinks there is stagflation going on around the world at the moment,” she said.

“I wouldn’t even use the term stagflation in the current circumstances. Stagflation [is about] a prolonged period of high inflation and very poor growth and poor employment outcomes. We’re not in that situation.”

Treasury secretary Jenny Wilkinson, who sits on the Reserve Bank committee that sets interest rates, did caution that the situation in the Middle East could deteriorate.

She told the same committee that Australia’s three major trading partners, China, South Korea and Japan, had strong supplies of oil, while other parts of th