Senate Economics Legislation Committee, , 3:17:15 to 3:23:38
Assessment of the inflationary impact of massive data centre investments and the potential financial stability risks associated with AI-driven market exuberance.
Topics: Data centres, Artificial intelligence
Speakers: Senator Nick McKim, Michele Bullock, Dr Brad Jones, Dr Sarah Hunter, Dr Christopher Kent
Thanks, Ms. Thanks, Mr. Hauser. I've just got two other two more quick questions, then I'm done. Firstly, uh let's just go to domestic demand then. Um behind the US and China, Australia's third for the pipeline of data centre projects globally. Um, you know, 156 billion in the pipeline. Um we're obviously a much smaller economy than either the US or China. Um our economy, you'd probably agree, Ms. Bullock, but if you don't, please say so, but our economy is sort of at or near capacity at the moment. Um what are the inflationary impacts of um this massive uh looming investment into data centres? And would you agree there's only really two possible outcomes? Uh uh a collapse or a correction in the financial markets, which are you know basically massively reliant on tech growth at the moment, or if the bubble doesn't pop um then obscenely high prices for II AI products to just justify the capital outlier outlay. One leads to financial risk, the other uh to sustained inflation, which are both within your um areas of responsibility. Do you share any of those concerns?
Uh there's quite a lot of concerns there, Senator. Um, in terms of uh demand, yes, data centre uh build-out in Australia is adding to demand, investment spends much stronger than we thought. Um a large chunk of that is imported, so it doesn't add to domestic capacity pressures, but does add to uh some pressures, particularly in terms of uh construction of warehouses, for example, and skilled labor who need to do this. So it does potentially add in that way. Um and to the extent that it's drawing resources from there, those resources have to come from somewhere, so that does add to inflationary uh pressure. Um the financial markets uh side of things, um, this is something that we have sort of alluded to, I think, in our financial stability review about the potential for um uh this to unravel a bit uh very quickly. I might just ask Brad to give a couple of reflections on that.
Uh Brad Jones Assistant Governor Fincial System. Uh the question here is not is this tech going to be transformative, it's whether the financial markets have just gotten ahead of themselves and pricing in a lot of good news. That's really the issue at hand. It's not for us to uh I think to to suggest that there's an irrational amount of exuberance, but there's clearly been exuberance uh in this space if you look at earnings expectations. And the amounts of debt that is now starting to be deployed to fund some of this expansion. So at the moment we're not at DEF CON one on AI related imbalances in the financial markets, but it's a clear watch point because we are seeing risk appetite increasing in a pretty notable way around the world.
All right, thank you. Last question for me. How worried are you about the pace of the increase in unemployment? And specifically, what rise in unemployment would give the RBA cause for a reasonable concern that we would head into recession. And just, I mean, that's the question, but the context here is you've said around two thirds of rate rise impacts is through the exchange rate, and your former uh colleague Lucy Ellis said uh that implies a lot of pain for little effect on inflation. And if the dollar's likely to rise off things like increasing copper demand because of uh AI data centre investment, um does this change your approach to targeting the exchange rate?
Um so let me be right up front, we're not targeting the exchange rate at all, Senator. It's a freely floating exchange rate. It is um basically determined in markets on the basis of interest differentials, commodity price, terms of trade, those sorts of things. We don't think it's out of line at the moment at all. Chris, would you like to comment on that?
Yeah, uh our best estimates is that it's in line with historical estimates of this long run determinants, which, as the governor said, uh interest rate differentials us versus major advanced economies and commodity prices.
Oh, sorry, can I just ask the question again? Are you worried? How worried are you about the pace of the increase in the unemployment rate and what uh pace of increase of unemployment would give you cause for concern that we may be heading towards a recession?
We're not uh we're not worried about the pace of increase in the unemployment rate at this stage. Um we do forecast that it has to gradually um move up. That is very different than saying that people have to lose their jobs. In fact, we are forecasting that employment continues to grow. It just means that the supply of labour is growing a bit more quickly than jobs can keep up with. And I can't be specific about what we think you're referring to the Nairu. I can't be specific about what that number is. But what I can say is we think that it's probably above where the unemployment rate is at the moment. So the unemployment rate, in order to ease some of these capacity pressures, probably will be rising a bit further, and that's what will be in our forecast.
I might just add uh to the governor's response in the context of a recession, and if you're defining that through the usual sort of technical definition, which is two courses of negative growth for GDP, uh, we're obviously monitoring a very wide range of indicators across the real economy, including the labour market, but also spending trends across all of the major categories. Um, and there's a various sort of sets of lead indicators and real-time indicators that we can track to look at that, and to just to reiterate what the governor says, at the moment, our assessment is that none of those indicators are suggesting that the economy is in or heading into a recession uh in the near term. So that's not what we're seeing or expect to see um over forecast horizon.
All right, thank you.