Speakers: Jenny Wilkinson

Transcript

Jenny Wilkinson

Alongside these geopolitical pressures, the global economy is experiencing another powerful but very different force through the rapid expansion of investment in AI. While the energy shock is constraining supply and weighing on activity, the AI investment boom is supporting growth while also adding to pressure on global prices and resources. AI investment is already very strong. Capital expenditure by the five largest global hyperscalers is forecast to exceed 1.1 trillion Australian dollars in 2026, which is more than four times its level in 2023. This contributes to our optimism about AI's potential longer term economic and productivity benefits. In the near term, however, the scale of investment is increasing competition for capital and key inputs, including computer chips, construction capacity and skilled labour. There are early signs of this in several economies, including the US. After decades of decline, US prices for some computer equipment have recently risen markedly. In this sense, the investment that should expand productive capacity in the future is also adding to inflationary pressures today. These forces have contributed to a revaluation of sovereign bonds as markets anticipate tighter monetary policy and reassess neutral real interest rates. This partly reflects strong demand for capital from both the private and public sectors. In some economies, for example, parts of the euro area, widening sovereign bond spreads also reflect concerns about fiscal sustainability. At the same time, the strength of the AI investment cycle has contributed to the strong performance of global equity markets this year. These global developments are flowing through to Australia. Real GDP grew by 2.3% in 25-26, which is in line with our forecasts at budget. Growth was supported by household consumption, dwelling investment and business investment. Growth in public demand has eased, while unemployment remains low by historical standards, and the participation rate is close to historical highs. On the other hand, capacity constraints are contributing to persistent services and housing inflation, and this is being exacerbated by the conflict in the Middle East, with higher fuel and supply chain costs adding to those pressures. Household and business sentiment is subdued, with households and some businesses being particularly exposed to these rising costs. The effects of tighter financial conditions and weaker sentiment are increasingly evident in the housing market in particular.