Why Alan Kohler is worried about a recession

ABC. This podcast contains audio advertising. To hear it without ads, head to the ABC Listen app now. ABC Listen. Podcasts, radio, news, music, and more. Business big and small is shaping our economy, our present and our future. But it's a loud and busy world out there and you need voices you trust to unpack the big stories and ask the right questions. I'm Karin Tinklar, host of the new podcast ABC Business Daily. Monday to Thursday, we take the big business stories and break them down. What happened? Why it happened? Who would help? Who would hurt? Search for ABC Business Daily on ABC Listen or wherever you get your podcasts. Could the around war lead our economy into a recession? The answer is yes. Oil shocks have resulted in that in the past and as petrol and diesel prices climb, it could happen again. Today, the ABC's finance expert, Alan Kohler, on why he thinks this could be one of the great disasters of our lifetime. I'm Sam Hawley on Gadigaland in Sydney. This is ABC News Daily. Alan, why don't we begin back in October 1973? Now, this is when the oil producing countries in the Middle East, they slapped an oil embargo on America and other nations and it wasn't a very good time. Just remind me what was going on. Well, October the 6th, 1973 was the beginning of the Yom Kippur War, which that day was a Yom Kippur, the Jewish Holy Day, and the Arab states led by Egypt and Syria attacked Israel. That war went for 19 days and obviously America supported Israel and a few other countries did too. And the Arab states also in what was then called the Organization of Arab Petroleum Exporting Countries, put an embargo on oil exports to them. But it wasn't a big deal for global suppliers. I think global supply of oil sort of fell by 5 or 6 or 7 percent, not much. The main thing that happened was that at the same time, the Arab oil exporters increased the price of oil from $3 to $12. They'd quite droopled the price of oil. In those days, the price wasn't set as it is now in the futures market. And so what happened was that the war finished or the embargo ended, but the price of oil never went back below $12.00 a barrel. Okay, so the price of fuel spiked and then it stayed high for a long time and inflation followed suit. It stayed high. Yeah, what happened was the price going up, the price of energy or oil going up caused a big burst of inflation and also slowed the economies of the world down. At the same time, it was like a whole bunch of rate hikes that produced a recession. So there was both a recession and inflation, which became known as stackflation, a combination of stagnation and inflation. And then in 1979, there was a strike of Iranian workers which led to a big decline in Iranian output. But then the Iranian revolution took place and OPEC increased the price again by double. And so there was another burst of inflation as a result of that, another increase in the price of oil. And Paul Volkot was appointed chairman of the Federal Reserve in the US in August of 79. And a month later, he increased interest rates to 20%. And that caused a massive recession around the world. So the US, Japan, United Kingdom and of course Australia all ended up in recession. Correct. And it was all just a direct result of those two oil shocks, 73 and 79. But it was terrible. Yeah, I mean, just I don't want to harp on how bad it was, but just give me a sense of what it was like in Australia at that time. Well, unemployment went to 11%. And that's the main thing. And that's what happens in a recession. It's unemployment goes up and a lot of people lost their jobs. And it was terrible. It was misery for a lot of families and not just Australia around the world. It was terrible. And it wasn't until mid 1980s, right, that these major economies started to really recover. I mean, it took ages to get over it. Yeah, that's right. And then 10 years later, we had another recession. So Alan, we've gone down that rather depressing route of history, because of course it provides us with some context today, because we have seen, of course, oil prices skyrocket again because of the around war. And at the Bowser, of course, people are paying a lot for their petrol and their diesel. Now, last week, the head of the world's leading energy agency, the IEA, was in Australia. And he had a rather dire warning. He said that the current oil shock is worse than the two shocks in the 70s that we've just spoken of, as well as the gas crisis that was caused by the Russia-Ukraine war. The station is very severe. Many of us remember the two consecutive oil crisis in the 1970s. In each of the crisis, the world has lost about 5 million dollars per day. Both of them together, 10 million dollars per day. And today, we lost 11 million dollars per day. So more than two major oil shocks put together. So that sounds pretty bad. So what he's talking about is the amount of shutdown of oil supply. So 20% of the world's oil supply comes through the straight of all moves out of the Persian Gulf. And that's now down to 5%. Now that's like four times the amount of oil supply that was shut down in the 1970s. Obviously, the price rise this time is not as much. The oil price this morning is 115, was before this, it was 65, so it's up what's 70% not even doubled yet. Whereas in 73, it quadrupled overnight. The trouble is that, if you think about it, inflation's bad, but having no energy is crippling. It basically means that you can't operate an economy. Another investment strategy is to follow his saying that if this goes on for another 10 days, there'll be a global shutdown of the economy as there wasn't a pandemic. And it's not just fuel, is it though? One of our concerns particularly for our farmers is that fertiliser is at risk as well. That's right. So there's lots of stuff coming out of the Persian Gulf. The fertiliser prices have now spiked. I was reading this morning that Australian wheat farmers are planting much less wheat at the moment than they normally do. So the harvest at the end of this year will be much less than it usually is. And also, the fertiliser decline in increasing prices likely to lead to food shortages around the world. The supply of helium is also down. And helium is used in the manufacturers of semiconductor. So that'll have a big impact on computers and so on. And the IA chief, he also warned that even I suppose if this war was to end tomorrow, which it doesn't look like it will at this point, but there's no quick recovery from this point. There's a lot of damage now to production facilities on both sides of the Persian Gulf. So that'll take a while to rebuild to get back. And obviously now depends on how long this goes on for. I mean, I think it's shaping up as one of the great disasters of our lifetime, really. Oh, God. We better explain that further. I mean, just, you know, how could this play out for the global economy and for us? Well, you know, it depends on how long it goes for. The market is predicting two interest rate rises this year. If it keeps going and inflation, I think Jim Charms, the treasurer has said the other day, the treasurer had told him that if it keeps going inflation will be 5%, between 4 and a half and 5%. If that's what happens, if inflation does go to 5%, I think there's a bank here, no option than to react and put interest rates up more. And I think that would make a recession almost inevitable. You know, a recession in the sense of the economy going backwards to quarters in a row. So look, if it keeps going, I think we're heading for a global recession of some sort. It's hard to, I mean, the market's very interesting. The share market is not down that much. It's, you know, it's down about 7%, in Australia, sort of 8%, 9%, elsewhere, the NASDAQ in the US is down 10%. So the market's reacted, but it's nowhere near what you might expect. You know, a worse oil shock than the 70s. and the market's down more than 10%. So a lot of strategists and economists are saying, well, the market's just getting it wrong. - Yeah. - And I think to some extent, the market is still thinking that it's tariffs again, because what happened with tariffs last year is the market fell quite a lot, like 20% quickly and then recovered quickly because Trump backed off and it was called the taco trade, which stands for Trump always chickens out. But I don't think it's like that this time, even if America does pull out. What will Israel do? Because they seem to be showing in Lebanon that they're going to use this opportunity to remove their enemies once and for all. So if America pulls out and Israel continues at war with Iran, the straight-up almost probably won't open again. I mean, the reason it closed was because the insurance companies canceled insurance and ships can't go through without insurance. So when the insurance companies be confident enough in the peaceful nature of the region to reinstate insurance, then that might take more than simply Trump chickening out. - Okay, so the markets are remaining calm. I gather from you, you're saying, you don't think they should be so calm, right at this point. But just tell me what are those steps if we were to end up in recession? What are the steps that happen before we enter that? Like what do we see? - Oh, well, we see the price of petrol and diesel continuing to go up, you know, $3, keep going, $350. $4, I don't know. I mean, that in itself will be recessionary. Basically, all the products we consume are delivered by trucks. And, you know, they're screaming at the moment already. And the diesel prices, $3, a bit more than $3. So if it keeps going up, it'll be a massive hit. And then, of course, if the reserve bank responds by putting up interest rates, that'll be an absolute double whammy. So the government would then have to respond with some fiscal stimulus of some sort which will go against what the reserve bank's trying to achieve. - And when would the reserve bank need to change course? - I suppose when we're in recession, I guess. - Right. - And people are losing their jobs. - Well, yeah, they tend to try to anticipate things to reserve. Thanks. So in the past, they've tended to cut rates on the way into a recession because they could see it coming. I'm not sure what would happen this time. I mean, particularly if they were the ones causing the recession. - Well, Alan, just tell me then, how quickly would this war need to end in your view? So we could actually avoid all these rather dire scenarios. - Tonight would be good. - Right. - I mean, yeah, I don't know. I mean, I think it's obviously already gone on too long. The Yom Kippur War went for 19 days. It's heading for more than that. - So how worried then should we be? I mean, we have with stood some pretty bad times before. We kind of got through COVID. We kind of got through the GFC, right? How worried should we be this time? - We'll get through it. Whatever it is, we'll get through it. It must have been the end of the world. But, you know, it's, I'm looking on pretty worried. I think it's a poorly decision to have made to just start bowling Iran like that. What do they think was going to happen? - All right, well, it sounds like tough times ahead, Alan, but there's always a path through these things just to give us a positive at the end of this episode. - Oh, well, the positive is that, well, the regime in Iran is absolutely terrible people running that country. I mean, honestly, be great if they were born out of existence. Unfortunately, I don't think it's possible, but, you know, I think, you know, to some extent, Israel and US have got right on their side because how terrible these people are running Iran are. But unfortunately, it doesn't seem to be working at this point. - Alan Kohler is the ABC's finance expert, Hatchim on the 7 p.m. news on ABC TV. And he also hosts the "That's Business with Alan Kohler" podcast every Friday, find it in the ABC Business Daily feed on ABC Listen. This episode was produced by Sydney Pede, audio production by Sam Dunn. Our supervising producer is David Kohler. I'm Sam Hulling. ABC News Daily will be back again tomorrow. Thanks for listening.