Economic Update - February 2026

AI bubble concerns morphed into the 'SaaSpocalypse' as AI agents threaten to eat all software and replace all jobs. Perhaps the governor of the RBA may feel a little nervous as the RBA wrestles with still-rising inflation. Elsewhere, Takaichi recorded a historic election win and Trump turned his attention to Iran.

What happened in Australia?

As expected, the RBA raised interest rates by 25 bps to 3.85% at the start of February. Inflation began to rear its ugly head last July, but the RBA initially wrote it off as temporary. Strong employment and inflation results last month, however, have forced the RBA to admit that the rise in inflation may not be temporary. Rather, the economy is running a little too hot, with aggregate demand outstripping supply.

“Our updated view, driven by the latest data, is that demand was stronger than expected over the second half of 2025 and that some of that strength has carried into 2026.” Michele Bullock, RBA governor, Monetary Policy Decision Media Conference, 3 February 2026.

RBA also admitted that it was no longer sure that interest rates were restrictive. A rate rise was thus inevitable.

Data released in February confirmed the view of a stronger-than-expected economy. January inflation saw the RBA’s preferred measure, trimmed-mean inflation, rise from 3.3% to 3.4% on an annual basis. Headline inflation remained at an uncomfortably high 3.8%.

The end of federal government electricity rebates was a major contributor to the strong inflation result: electricity prices increased 32.2% over the year. However, clothing and footwear (5.6%), education (5.4%), and alcohol and tobacco (5%) also increased strongly.

Worryingly for the RBA, goods inflation has increased from 1.2% in June last year to 3.8% in January and is now almost level with services inflation (see chart below).

Source: ABS

The Wage Price Index also increased in the December quarter to 3.4% (see chart below). This will remind the RBA that the labour market remains tight and that if inflation runs away again, like it did in late 2022, wages may rise again strongly.

All this points to another rate rise soon. The RBA will be keen to see the latest GDP results in early March. 

Elsewhere, Rio Tinto walked away from the potential merger with Glencore, which would have created the world’s largest miner and would have bolstered Rio’s copper portfolio. BHP released its half-year profit result in February, which for the first time had copper generating the majority of its revenue.

Source: ABS

What happened around the world?

USA

February was defined by five huge events. 

On Friday, Janaury 30, Anthropic released a bunch of plugins for its desktop AI agent Claude Cowork. Notably, it included a plugin for legal work. On the following Tuesday, February 3, SaaS stocks tumbled as investors realised that AI agents had progressed to where many companies could take software applications in-house with the help of AI. The NASDAQ fell as much as 2.4% in trading, while a Goldman index of software stocks fell by 6%. The market called it the SaaSpocalypse!

But this was just the first round of the SaaSpocalypse. On Sunday, February 22, little-known research firm Citrini released a speculative report on the future impact of AI. The report tells a tale of 10% unemployment in 2028, SaaS losses, and AI agents replacing everything from real estate agents to DoorDash.

“This isn’t bear porn or AI doomer fan-fiction. … Hopefully, reading this leaves you more prepared for potential left-tail risks as AI makes the economy increasingly weird.” Citrini Research.

The report’s doomsday vibe caught fire in the markets’ imagination and hit companies negatively exposed to the AI trends identified in the report. American Express, Blackstone, and DoorDash all fell by 6% or more. News also hit IBM that Anthropic’s AI coding tool could help replace legacy COBOL systems. COBOL is a coding language from‌1959 that is still used by a surprisingly large number of critical systems throughout the private and public sectors. Maintaining COBOL systems has long been lucrative for IBM and IT consulting firms.    

On February 20, the US Supreme Court ruled that President Trump could not use the International Emergency Economic Powers Act (IEEPA) to impose tariffs.

As expected, the Trump administration has now turned to tariff powers under section 122 of the Trade Act 1974. But section 122 tariffs cannot target specific countries, and they require congressional approval after 150 days. They can, however, target specific goods. Tariffs will now be less of a stick in bilateral negotiations. 

Also on February 20, UK property lender, Market Financial Services filed for administration which focused attention on a web of connected financial firms in the UK and US. It looks like another Jamie Dimon cockroach!

Then, early Saturday morning US time on February 28, President Trump announced that US and Israeli forces were striking targets in Iran.

Among these four events, there was another raft of mixed economic data that will keep Fed watchers off-balance.

A whopping 130,000 increase in jobs in January pleasantly surprised the market: it was more than double estimates and the largest increase in over a year (see chart below). This contributed to a fall in unemployment from 4.4% to 4.3%.

Source: Bloomberg

However, a week later, markets were disappointed by GDP growth falling from 4.4% annualised in the September quarter to 1.4% in the December quarter (see chart below). Markets had expected 2.8%.

The 43-day government shutdown certainly played its part, with government spending decreasing by -5.1% annualised in the quarter. More importantly, given its size, consumer spending fell from 3.5% in September to 2.4% in the December quarter.

Meanwhile, inflation measures went in different directions. CPI fell from 2.7% to 2.4% on an annual basis in January while the Fed’s preferred measure PCE increased slightly from 2.8% to 2.9% (see chart below).

China

The IMF called out China for its overemphasis on exports. 

“... China cannot count on ever-higher exports to drive durable growth in the coming years. That makes pivoting to consumption-led growth the overarching policy priority.” IMF.

With consumers yet to recover from pandemic lockdowns and the property crisis, China has leaned into exports to keep the economy moving. This has led to record trade surpluses (see chart below) and increasing bilateral trade tensions. Given that tariffs are back in vogue, China could quickly face higher tariffs around the world. Then again, countries may wait a little to soak up some deflation from Chinese imports.

While exports may be booming, manufacturing is still struggling; the official manufacturing PMI decreased again to 49 in February.

Next month, all eyes will turn to the National People’s Congress for new policy announcements and the growth target for 2026.

Source: Bloomberg

EU

As expected, the ECB kept interest rates on hold in early February, pointing to a “resilient economy” underpinned by past interest rate cuts and increasing defence spending.

While euro area inflation continues to fall and is now at 1.7% (see chart below), the fall in retail spending (-0.5%) and industrial production (-1.4%) in December compared to November will give the ECB pause.

Japan

Japanese Prime Minister Sanae Takaichi’s election gamble has paid off handsomely. The LDP picked up 118 seats to win 316 of the Diet’s 465 seats: the biggest majority in post-war Japan.

Crucially, the two-thirds majority in the Diet means Takaichi and the LDP can overrule the Senate, where the LDP remains a minority. 

“Japan’s economy is now at a critical juncture for achieving sustainable and strong growth,” Yoshinobu Tsutsui, Keidanren, chairman.

Japanese shares and the yen rose on news of the win. Japanese government bond yields erased the craziness of January (see chart below). While some may be concerned with gung-ho spending under Takaichi, markets have embraced the political stability the win will bring. Takaichi is the fourth prime minister in the five years since Shinzo Abe stepped down. She may now secretly dream of surpassing Abe’s record nine-year term.

Takaichi will be keen to tackle the economy, which grew at 0.2% annualised in the December quarter versus an expected 1.6%. She will be helped by her appointment of two dovish academics to the BoJ board. 

UK

With high inflation and rising unemployment, the BoE was split again, this time 5 to 4 in favour of leaving rates unchanged; four were in favour of a 25 bps rate cut.

Subsequent data releases suggested that perhaps a cut would have been the better option. Estimates for the December quarter showed the second-consecutive quarter of 0.1% growth compared to the previous quarter (see chart below). Unemployment increased to 5.2% in the quarter, and inflation fell from 3.4% in December to 3% in January. 

New Zealand

The RBNZ kept rates on hold in February. With rates in an accommodative setting, the economy still recovering from a difficult 2025  and inflation just outside the target band, the RBNZ saw no reason to change rates.

The biggest data shock during the month was news that former New Zealand prime minister Jacinda Adern is joining the mass exodus to Australia and is moving to Sydney.  

What this means for Australian Private Debt

The Australian economy is performing stronger than expected, and given the supply constraints, this has translated into increased inflationary pressures. While interest rates are heading down elsewhere, the RBA remains vigilant and is likely to increase rates again soon. Once again, holders of Australian private credit can enjoy a nice return from a strong economy.