A leading economist has shared his predictions on the long-term impacts of the Iran war, saying the geopolitical ramifications could reshape the world order for years.

Shane Oliver said the fuel shock caused by war in the Middle East was the latest in a string of shortages to hit this decade, which have resulted in higher prices and inflation being baked into the economy.

Mr Oliver, AMP’s chief economist, has identified nine key longer-term consequences of the Iran war that he expected would last well beyond the current uncertainties.

On top of worsening cost-of-living and inflation expectations, other impacts he listed were increased geopolitical risks, a new generation of terrorists, increased defence spending, a bigger government and more public debt.

“The longer term picture is not all bleak, but it does pose more problems for the global economy,” he told news.com.au.

“Because basically what’s happened here is we’re having one crisis after another.

“And that’s obviously leading to higher price levels globally and in Australia at a time when inflation had already sort of stopped falling.

“So in many ways what we’re seeing, I think, is just, reinforcement of the trend that had emerged over the last 15 years, ever since the GFC (global financial crisis), towards greater nationalism, increasing geopolitical risks, more inflation-prone economies.”

Living standards at risk

The US-Israel attack on Iran has sent shockwaves through a global economy that has relied heavily on oil exports from the Middle East.

Mr Oliver said it was the fifth major global shock in the past 20 years, after the GFC, Eurozone debt crisis, Covid-19 and the Ukraine war-led inflation spike in 2022.

He believed that the rise of political populism and nationalism during this period could see countries like Australia become less dependent on the Middle East for fuel, with calls already being made to build our own new oil refineries.

Mr Oliver understood these sentiments but warned becoming a more insular nation would come with a higher cost to Australians.

”We went through an environment over the last 40 years where economics was in the driver’s seat. Now we’re going into an environment where geopolitics is in the driver’s seat, so to speak.

“So rather than resources being allocated globally on the basis of optimal economics as determined by global prices, resources will increasingly be allocated by populist politicians and geopolitical pressures, which, which has the outworking of slower economic growth and more of inflation-prone economies.”

Mr Oliver said the improved living standards of the 1990s and 2000s were driven by rapid economic growth over the decades but that could now go the other way.

“And to some degree that’s been evident over the last few years in Australia where productivity has been depressed, productivity growth has been depressed, and living standards have been somewhat stagnant.”

Mr Oliver said the war may have robbed the Australian government of a chance to address some spending and productivity issues during the May budget.

He expected the oil shock to accelerate a shift to electrification and electric vehicles to lessen Australia’s exposure.

A tougher outlook for Australians

Westpac consumer sentiment report for April showed consumer confidence was at its lowest levels since the GFC of 2008 after dropping 12.5 per cent.

Its head of macro-forecasting Matthew Hassan said near-term expectations were for a drop back to the cost-of-living crisis lows of 2022-23.

He said on Tuesday job loss fears had risen to a 10-year high, excluding the Covid pandemic, and consumer confidence was at near-historic lows.

Mr Oliver said the natural inclination was to hope that government would step in to ease the burden on households but warned that “reliance on government has limits”.

“It can help some things in the short term, but ultimately it can actually make things worse,” he said, adding more government intervention can dampen productivity.

He explained why he believed the “cost of living crisis will continue” in coming years.

“We’ve already in a situation where prices have increased by about 5 to 6% more than wages have over the last five years. Since the end of 2020,” Mr Oliver said.

“This suggests that problem will continue.

“And it’s all very well to say, well, we just, you know, push wages up by more, but if inflation has got to be five per cent as of June this year, and then everyone’s going to get a five per cent wage rise, it just locks in the high inflation prime and we end up chasing our tail.

“The only way to resolve the problem is to find ways to boost productivity.

“And that arguably was to be one of the key focuses of the budget. but it looks like the budget’s been overtaken by events and will be dominated more by cost of living measures.”

‘Won’t get back to the lows’

One of the trends Australians have noted in recent years is that once the price of goods goes up during an economic shock, it takes much longer for them to come down – if they ever do.

Mr Oliver noted that petrol prices have historically not returned to levels seen before an economic crisis, pointing to the example of the Ukraine war shock.

Oil hit US$120 per barrel soon after the outbreak of war but had fallen back to US$67 before the Iran conflict began in February this year.

“So oil prices had halved … which should have meant that our petrol prices should have come well down from, around a $1.80 to $2 a litre.

“They came down to about $1.50, if you were lucky, in the right servo. But we should have been heading back towards $1.20 or something.

“But we never got there. And so that prices just got ratcheted in into the system.”

He said this was an example of how when prices for certain commodities “go up, it’s very hard to get them back down”.

“And I suspect the same thing happens here that prices will go up for fertiliser and a whole bunch of other things.

“And there may be some fallback, but they probably won’t get back to the lows again. And the broad picture, across a whole range of prices will, that will be that they will be higher.”

As for the push to take more control of oil production in Australia, Mr Oliver warned although “we probably can do that – that will come with a cost”.

“And so you might find in a decade’s time we are less dependent on Iran, but it will have meant that will have come with some cost,” he said.

“We might have more refineries in Australia, but that will cost more to do that. And that embeds more cost into the system in Australia and therefore it means it has a longer lasting effect.”