Key insights from the week that was.
In Australia, GDP rose 0.3% (2.5%yr) in Q1, in line with our expectations. Our analysis suggests the data centre build-out was responsible for all of the growth in the quarter. This manifested as the largest jump in new business investment since the early 2010s mining investment boom – up 5.7% to be 10.4% higher over the year. A large portion of the relevant inputs are imported, hence net exports 0.6ppt subtraction from GDP and a widening in the current account deficit to –$27.1bn, but there is still material value-add in the construction of this infrastructure. To the extent that April’s goods trade data showed imports of data centre-related components still running at pace, this trend will continue to have a significant bearing over activity and productivity for the foreseeable future.
Elsewhere across the economy, activity was soft. Spending by the public sector was little changed as infrastructure projects drew closer to completion and energy bill rebates rolled off. Household consumption growth across discretionary categories was also sluggish – a risk flagged well in advance by our card tracker. This is not a surprise given the cost of living, restrictive interest rates and bracket creep. Having declined 0.2% in Q1, real household disposable income will face additional pressure in coming quarters as the full impact of these forces transmits through.
This tension between inflation and incomes was at the heart of the Fair Work Commission’s decision to raise award wages by 4.75% from 1 July 2026. While this will go some way towards protecting more vulnerable workers’ wages, it won’t fully offset the impact of inflation. As firms face rising costs of production and, at the margin, labour market slack builds, workers’ bargaining power is likely to remain limited outside of jobs where the Fair Work Commission’s decision dictates terms.
For housing, the initial impact of 2026’s rate increases and the uncertainty created by the proposed Federal tax changes saw the Cotality house price index dip another 0.1% in May after a 0.2% fall in April (revised down from a 0.1% gain). This weakness was concentrated in Sydney and Melbourne, though price gains across the smaller capitals are expected to moderate in the months ahead. Higher building costs and tighter financing terms are adding pressure to supply, evinced by the 3.4% decline in dwelling approvals in April.
Data received from offshore was secondary in nature and had little market impact. Participants’ focus instead remained on the outlook for US tech firms and developments in the Middle East. On the latter, terms agreeable to both sides are yet to be found; but both sides continue to signal an intent to resolve their differences, with hostilities limited to small skirmishes and ‘defensive’ actions. The market also remains hopeful, Brent Oil this week trading a circa USD93-97 per barrel range versus the recent peak of USD110 despite the ongoing depletion of global inventories.
On the data front, the Federal Reserve’s latest Beige Book was arguably the key release for the week. It highlighted the disparate conditions faced by households of different income and wealth levels and that, as more were squeezed by the cost of living, “residential mortgages, consumer, and agricultural loan delinquencies were noted as rising in several of the Districts”. The labour market was characterised as stagnant, and aggregate wages growth in line with inflation. For businesses, “Non-labor input costs continued to rise faster than selling prices, contributing to broader concerns about margin compression.” Without relief from the current conflict, the US economy is likely to come under growing pressured and uncertainty, particularly as the FOMC and market recognise the bind the economy is in vis a vis capacity outside of technology.
Over in the Euro Area, while this week’s inflation print justifies the ECB hiking next week, as we and the market expected, this decision is likely to be one of only two increases in 2026, in effect a minor recalibration of the stance of policy to fend off inflation risks without material impact on economic growth or the labour market. Businesses and households across Europe should therefore remain confident in the outlook, allowing growth to re-accelerate through 2027 and 2028.
