AI boom to place upwards pressure on interest rates, economist warns

While the AI boom is driving surging data centre construction in Australia, with the Commonwealth Bank of Australia (CBA) valuing the nation’s boom at $150 billion until 2030, and opportunities for non-residential construction companies and technology companies surging, this sector’s labour appetite for data centre projects will impact the availability of labour in the residential construction sector, an economist has said.

Along with the burdens that the labour shift would place on residential construction progress, Creditor Watch chief economist Ivan Colhoun told Accounting Times that it would also put pressure on building material prices.

“[Non-residential construction approvals have] effectively doubled in the last year: two of the highest three months ever have been in the last 3 months,” he said.

“There’s a really strong pipeline emerging in [the AI] sector. AI is a real space race, or arms race, a race to be first, so the likelihood is that there will be greater wage pressure, or wages paid there, which may divert labour resources out of residential construction.”

Colhoun said that the boom would also add to inflationary pressure through the rising costs of technology and raw materials such as “components, copper, demand for electricity, water”.

“And whenever you get inflation, you tend to get higher interest rates, and … that’s probably the negative side of the AI boom, is that it’s going to keep interest rates higher for longer, probably put them up in September, and that creates challenges for anyone that’s carrying a lot of debt,” he said.

Colhoun predicted that the impacts of the AI boom on residential construction and labour would endure for the next six to 18 months.

Further rate rise

Because of this, Colhoun said he also predicted another interest rate rise in September due to short-term inflation impacts, which would put upward pressure on interest rates, rather than the AI boom.

“I think maybe early next year, you could see another interest rate rise because inflation’s still too high in Australia. So the easier forecast is that there’s no early interest rate cuts unfortunately,” he said.

Colhoun told the brand the nation’s economy is in a slow tightening cycle because inflation has been above target in Australia for nearly five years.

“The Reserve Bank tries to keep inflation to 2.5 per cent on average. We’re running around 3.5 per cent at the moment,” he said.

“So they wouldn’t be reducing interest rates until they are sure that inflation is back on track to average around two and a half per cent. Andthat’ss going to be hard with the AI boom, adding some extra inflationary pressure.”

For Colhoun, currently, the Australian economy is facing five “megatrend” pressures: geopolitical pressures, the environment, technology, inequality, and an ageing population.

To tackle these, Colhoun said the government must limit its spending as a percentage of GDP to ensure the budget deficit does not get too far out of control.

“The top marginal income tax rate cuts in at far too low a level. That is not a lot of incentive. Once you earn more than $190,000 a year, you spend half your time working for the government. Also, the GST rate is too low.”

“So what you actually need is to rebalance those two taxation measures: a higher GST rate and a lower income tax rate. That would be a positive development for me.”