Australia’s Next Economic Shock Won’t Be Inflation

Next week, the Reserve Bank is expected to leave interest rates unchanged as inflation has eased and the labour market remains resilient. I think that's a mistake. Not because inflation is about to surge again, but because the RBA is underestimating the most significant threat facing Australia's economy over the coming years: artificial intelligence.

A recent Goldman Sachs report identified 35 major Australian companies where labour costs have grown much faster than sales, making them prime candidates for AI-driven cost-cutting. Banks, retailers, healthcare companies, technology firms and industrial businesses are all on the list, and many have already said AI will play a bigger role in improving productivity. However, these are only the companies we know about.

Why the RBA Could Be Underestimating the Risk to Australian Jobs

Across corporate Australia, businesses are no longer just asking who they should hire next; they're asking whether they need to hire anyone at all. Which brings me to the most important point: are we walking into a recession because this is an efficiency story that is built around shareholder interests?

If this is correct, then it’s easy to understand that a company's top priority is shareholder satisfaction, and there is no better way to keep shareholders happy than rising profit margins. AI allows businesses to grow revenue while employing fewer people, which presents a different challenge for the labour market.

AI Could Change Australia’s Labour Market Faster Than the RBA Expects

The RBA spent years telling Australians that inflation was above the 2–3 per cent target band and that they couldn't ignore it. Yet, the Reserve Bank is expected to leave interest rates on hold again, largely because inflation has eased while unemployment remains within a range it believes is manageable. However, the unemployment rate is sitting at the upper end of what is acceptable, and I am concerned about where it could be in two years' time.

If Australian companies adopt AI as aggressively as many are signalling this reporting season, unemployment could rise above 5 per cent far quicker than traditional economic models anticipate. By the time the official data confirms that trend, thousands of jobs may already have disappeared.

The RBA has always argued that monetary policy needs to be forward-looking. If that's true for inflation, it should also be true for employment because I don't think the biggest risk over the next few years is another inflation shock; it will be a jobs shock.

Best and Worst Sectors

Information Technology was the best-performing sector this week, rising more than 7 per cent on the back of further falls in the oil price. Materials and Healthcare also performed strongly, gaining more than 6 per cent after attracting nifty buyers as both sectors are coming off double-digit pullbacks and are the hot picks for sectors that could shine during this earnings season.

At the other end of the market, Energy was the weakest sector, falling over 2 per cent as weaker oil prices drove demand for oil and gas stocks lower. Utilities also slipped under half a per cent as the heavily weighted stocks in this sector continue to exude caution, with prices trading sideways over the last couple of weeks. Given the uncertainty around the interest rate decision, it's no surprise the market seems to be weighing on this outcome to decide whether utilities are back in play.

Best and Worst Stocks

Genesis Minerals led the gains in the ASX Top 100 this week, climbing more than 17 per cent. This was followed by Vault Minerals up more than 16 per cent, and Greatland Resources, which gained over 15 per cent, with all three stocks benefiting from the strong overnight rise in the gold price, which appears to have now found a major bottom.

Woodside Energy was the weakest performer, followed by Ampol Limited, with both stocks falling more than 3 per cent on the back of the oil price wobbles. The Lottery Corporation lost over 2 per cent as the sell-off continued, after sellers took control at the heavily defended $5.70 level and pushed the stock sharply lower.

All Ordinaries Index Update

The All Ordinaries Index has finally done it, breaking to a fresh all-time high after surging 3.4 per cent so far this week. After months of grinding sideways and repeatedly testing resistance, the market has decisively broken through, confirming that buyers are firmly back in control.

What makes this move even more encouraging is that it was driven by multiple sectors. Technology, Materials and Healthcare led the rally, while Financials also played an important role. When multiple sectors are pulling in the same direction, it usually points to a healthier and more sustainable bull market.

The timing is ideal, with reporting season now underway. Markets are clearly looking ahead, particularly to stronger earnings from the Materials sector. However, this is still a stock picker's market. Some companies will exceed expectations, while others won't, making careful stock selection more important than ever.

The next key level to watch is 9,800, which now becomes the market's next major resistance. More importantly, the stubborn 9,200 level that rejected the market time and time again has finally become support, and that on its own should be reason to celebrate.

Good luck and good trading, everyone.

Dale Gillham is the Chief Analyst at Wealth Within and the international bestselling author of How to Beat the Managed Funds by 20%. He is also the author of the award-winning book Accelerate Your Wealth—It’s Your Money, Your Choice, which is available in all good bookstores and online.

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