AI Is Crushing the Economy, So Where Is the Abundance?

Everything costs more. Petrol in the big five cities hit 237 cents a litre in late September and diesel went past 286. The fuel excise cut that was supposed to soften the blow finished on 2 August and Albanese made it clear there wouldn’t be another one. Prices kept climbing anyway. Inflation is back to 4%, up from 3.5% a month earlier. Housing is up 5.7%, transport is up 5.6%.

And the RBA’s answer, as it always is, was another rate hike. 4.6% as of last Tuesday, the fourth increase this year, the highest cash rate in 15 years. Michele Bullock said the board knew it was going to hit some people pretty hard, “but we have to do it.” She also said the Middle East conflict “has made us all poorer in this country. That is a fact.” At least she’s not pretending otherwise.

We all know what’s driving most of this. The war with Iran started in late February and the Strait of Hormuz has been more or less shut since. That’s about 20% of the world’s oil, gone from the market. The IEA called it the largest supply disruption in the history of the global oil market, which sounds dramatic until you realise they’re probably underselling it.

The Saudis did the sensible thing and rerouted around 5 million barrels a day through their East-West pipeline to the Red Sea. Then in September drones launched from Iraq hit the pipeline and they shut the whole thing down. It restarted a couple of weeks later at a trickle and won’t be back to full capacity for another month or two. Oil went straight back over $100 a barrel.

So you have the one bypass for a closed strait being knocked out by drones. Nobody has a plan B for the plan B.

Then there’s the export bans. Russia has banned diesel exports. China has stopped exporting refined fuel. The US, the world’s biggest diesel exporter, is now openly talking about a diesel export ban with bills in Congress to make it happen, while the G7 agreed to release diesel stocks to try to calm things down. Every country is looking after its own and pulling up the drawbridge, which is exactly what makes a global shortage worse. Australia imports almost all of its refined fuel from Asian refineries and holds about a month of reserves. If you want to know why diesel is nearly $3 a litre, that’s why.

Unemployment hit 4.6% in August, the highest it’s been since COVID. Full-time employment fell, part-time rose, and 28,000 more people joined the unemployed queue. The RBA’s own governor has said she wants unemployment somewhere between 4.5% and 5% to take pressure off inflation. So this is working as intended. The rate hikes are supposed to cost people their jobs.

I know several developers right now who can’t find work. These aren’t juniors fresh out of a bootcamp either, they’re experienced people with a decade or more behind them. Every role they apply for has hundreds of applicants, sometimes more than 500. Seek’s own data says applications per job ad are at the highest level on record, rising every month since January while the number of ads keeps falling. ICT job ads were down 11.7% year on year by May. Atlassian cut 10% of its workforce in March and the CEO said it would be “disingenuous to pretend AI doesn’t change the mix of skills we need or the number of roles required.”

Credit for saying it plainly, I suppose. In the US, AI has been the number one stated reason for layoffs for five months running, cited in over 112,000 job cuts by July. That’s already double what it was for all of last year, and that figure only runs to July.

Which brings me to the title. We were promised abundance. Sam Altman wrote a whole essay about a “gentle singularity” where intelligence becomes “too cheap to meter” and the 2030s bring wild abundance in ideas and energy. Dario Amodei wrote one about machines of loving grace. The pitch was that AI would make everything cheaper, cure diseases, lift productivity, and we’d all be better off.

Where is it? I’m looking around and I see the opposite. Fuel is through the roof, groceries are up, rent and mortgages are up, and jobs are harder to get than at any point in my career. The abundance has arrived for exactly one group of people, and it’s the companies who worked out they can produce the same output with fewer humans on payroll.

AI’s measurable effect on the broader economy so far is tiny. An NBER survey of 750 executives found AI delivered a 1.8% lift in labour productivity last year and they’re hoping for 3% this year. Meanwhile PwC found 74% of the economic value from AI is captured by 20% of companies. The gains exist, they’re just going to a small number of firms, and those firms are using them to shrink headcount rather than lower prices.

I use these tools every day. I’ve written about how much more I can get done with them. I’m not pretending they don’t work. If anything they’re scarily good at a lot of tasks that until recently meant hiring someone, and often more than one someone. But if one person can now do the job of three, is that abundance? It’s efficiency. From a business perspective it makes complete sense, and I’d probably do the same thing if I were running payroll. From an economic perspective it means two people with no income, two fewer mortgages being paid, two fewer people spending money at the shops down the road. Multiply that across every office in the country.

Nobody who got made redundant this year would call that abundance. The economy is sliding backwards while the quarterly numbers still look fine, because the people who got cut are only now starting to run out of savings and the people who haven’t been cut yet are holding onto every dollar in case they’re next.

And where are the governments in all this? Doing what they always do, which is nothing useful, slightly too late. Australia’s response to a fuel crisis was a three-month excise cut, then a smaller one, then nothing, and a budget line for a fuel reserve that will take years to build. The US response is to threaten an export ban that its own analysts say won’t lower prices. Europe’s response is to beg the US not to do it. The RBA’s response to imported energy inflation is to make mortgages more expensive, which does nothing to reopen a shipping lane in the Persian Gulf.

Hiking rates into cost-push inflation doesn’t fix supply, it just punishes households for a war they didn’t start and a strait they can’t reopen. The RBA knows this. Their own statement blames the Middle East for the upside surprise in inflation. Then they hike anyway, because a blunt instrument is the only one in the drawer.

On AI, the response is even emptier. Governments have spent the last two years in a panic about safety, existential risk and deepfakes, while the thing hitting people in the wallet, the slow thinning out of white collar hiring, hasn’t produced a single policy from anyone. There’s no retraining scheme and no hiring incentive, and I haven’t even heard a minister acknowledge it’s happening. Every government has an “AI strategy” and none of them has a plan for the developer with a decade of experience and an inbox full of rejection emails.

So is Australia headed for a recession? GDP grew 0.4% in the June quarter, so technically no, not yet. But GDP per person went backwards earlier in the year, the June growth was propped up by imports, unemployment is climbing, inflation is climbing, and the cash rate is at a 15-year high with a war still on. Bullock said back in June that a recession was possible in a “really bad outcome,” and this week said it’s still not the base case. From where I’m sitting, with a shut strait, a bombed pipeline and the US threatening to hoard its diesel, the really bad outcome is the one we’re in.

In 2022 the labour market held everything up while rates went vertical, because there was nothing pushing against it. Companies still needed people. This time there’s a technology that lets them not need as many, and that pressure didn’t exist last time anyone tried to hike their way out of an energy shock. The effects of that haven’t fully shown up in the data yet. They will. My guess is we see a negative quarter before the end of the financial year, the RBA starts cutting again by the middle of next year, and the AI companies keep telling us abundance is just around the corner.