Is the Iran war worse than COVID? Here’s why it could be, and how a worst case scenario can be avoided

Imagine this time 6 years ago that there could be a crisis ‘worse than COVID’? Around this time, the ASX had crashed over 35% in just a few weeks, and the reason was COVID.

Well…in reality it was the uncertainty facing the global economy and business because it was right around this point that markets began to stabilise and went on a near 2-year bull run that ended when Russia invaded Ukraine in early 2022. Of course, the pandemic would go on for months, but that didn’t stop the bull run in the market and several companies benefiting in ways they otherwise wouldn’t have.

The question we are pondering in this article is whether or not the current crisis is or could be worse than COVID? And we are doing so this morning for a particular reason. Namely because the Consumer Confidence Index will be released later this morning, and last week’s index was the lowest since COVID, the second lowest on record, and only half of what it was in April 2021. And this was before the interest rate hike!

What are the Best ASX Stocks to invest in right now?

Check our buy/sell tips

Whether or not the Iran War is worse than COVID, it is bad…

…and that’s the reality. We assume most of our readers know what sparked the war and where things are at…namely at a stalemate, with neither side willing to give in. This could change, but someone will have to give in unless one side makes such triumphant moves that the other side has to surrender.

But Australia has been hit worse than most countries because we are fuel-import dependent, mostly from Asian refineries that are themselves dependent on Middle Eastern crude passing through the Strait of Hormuz. The country’s domestic refining capacity has been gutted over the past two decades, leaving it with strategic fuel reserves that successive governments have allowed to remain dangerously thin.

Australia’s diesel prices have already surged 50% amid the Middle East conflict, with supply risks looming. This is not merely a cost-of-living irritant. Diesel is the lifeblood of Australian agriculture, mining, and freight logistics — sectors that underpin the entire consumer economy. A sustained disruption to fuel supply does not just raise the price at the pump; it raises the price of everything that moves, which in Australia is almost everything.

We mentioned the consumer confidence index being at near record lows, and that was before the rate hike. Moreover, Australians’ inflation expectations have risen to 5.5%, meaning households expect that level of price growth to persist for the next two years. When you combine plummeting confidence with rising rates and a war-driven fuel shock arriving simultaneously, you are compressing household budgets from multiple directions at once.

We can’t ‘stimulate’ our way out of it without causing further inflation

Moreover, Australia is in this crisis carrying a significantly higher structural spending burden than it did in early 2020. The Albanese government’s successive budgets have locked in substantial ongoing expenditure commitments in disability services, defence, aged care, and housing.

The federal deficit has returned, and net debt as a share of GDP, while not alarming by global standards, has risen materially. The government cannot simply stimulate its way out of the crisis without risking further inflationary pressure: the very thing that the RBA is trying to suppress with rate hikes. The fiscal and monetary levers are, to an unusual degree, working at cross purposes. And so there’ll be no JobKeeper as there was during the pandemic. This was one of the key reasons markets stabilised quickly.

So this crisis is currently worse than COVID and could cause a worse impact. That said, it is not as if there are no ways out of it.

So now what?

There is a resolution, but it is not simply “the war ends.” Trump has hinted at winding down military operations while simultaneously deploying additional troops and requesting more war funding from Congress. Even if hostilities cease, supply chains do not snap back overnight. Shipping routes take weeks to normalise, fuel inventories need replenishment, and business confidence recovers slowly after sustained disruption.

The more actionable domestic lever is budget reform. The government needs to use this crisis to force a hard conversation about structural spending, not slash services, but prioritise and sequence expenditure to reduce the inflationary footprint of its own fiscal position. A credible medium-term consolidation plan would give the RBA cover to pause further hikes, or at least signal an earlier easing cycle, which would do more for consumer confidence than any short-term stimulus could.

Australia also needs, urgently and without further delay, a serious domestic fuel reserve strategy. The vulnerability exposed by this war was predictable and predicted. Its continuation as policy is indefensible. The Iran war did not create Australia’s economic fragility. It simply illuminated just how little buffer remained.

Conclusion

Of course we are not the decision makers. So the best we can do is sit back and hope ‘Trump Always Chickens Out’ and then things will go back to normal, but those are unlikely, certainly the second part is.

An ongoing crisis (i.e. 1-2 years of this situation) could indeed be worse than COVID, but it doesn’t have to be. The question is whether or not hard decisions need to be made with a realisation that standing still will be worse and that only implementing ‘bandaid solutions’ are as good as doing nothing.