Economic Update - January 2026

Politics overshadowed the economy in January. Fears of an AI bubble gave way to fears over Venezuela, Greenland, Iran, and Minnesota. However, economics cannot be ignored, and the month ended with the announcement of a new Fed chair, falling gold and silver prices, and a hot inflation result in Australia.

What happened in Australia?

While most Australians were out relaxing by the beach on their summer holiday, RBA Governor Michele Bullock was sweating over two big data releases during the month.

Instead of rising to 4.4% as predicted by the market, December’s unemployment rate actually fell! Falling from 4.3% in November to 4.1% in December on a seasonally adjusted basis (see chart below).

The tightness of the labour market in Australia and the US post-pandemic has surprised most commentators. The data in the second half of last year suggested a softening in the Australian labour market, but the latest data will have the RBA and commentators reassessing their forecasts.

The other big data release was stronger than expected inflation results for December. While the RBA’s preferred inflation measure, the trimmed-mean, only rose from 3.2% in November to 3.3% in December on an annual basis, headline inflation rose from 3.4% to an eye-catching 3.8%! Both figures are well outside the RBA’s 2% to 3% band and are headed in the wrong direction.

As inflation started to pick up again from July last year, the RBA initially saw it as temporary. The removal of state and federal rebates for electricity was seen as the big culprit. But towards the end of the year, Bullock started to worry out loud that maybe the economy was running hotter than expected and that interest rates weren’t as neutral as previously thought. The stronger than expected unemployment and inflation results in December have now confirmed Bullock’s fears.

“... the economy is closer to its supply capacity than we previously thought, which means supply constraints are binding in some more sectors and it’s not taken much pickup in demand to drive price pressures.” Michele Bullock.

The odds of an RBA rate hike increased dramatically after the two results and spoiler alert: in February Australia became the first major economy to start raising rates again.

No mortgage holder or government minister wants to see rates rising again, but with unemployment at a historical low and the economy still growing strongly, the situation could definitely be worse. The RBA and commentators will now recalibrate, while the government should take the signs of demand outstripping supply as another reason to kick-start productivity. When you come back bigger after the Christmas holidays, it’s nice to have bigger shorts to fit into!

What happened around the world?

USA

From Caracas to Greenland and Minnesota to Tehran, there was no shortage of political headlines for the US in January. And it was a similar story on the economic front, with the Department of Justice announcing an investigation into Fed Chair Jerome Powell on 9 January. President Trump then ended the month by announcing Kevin Warsh as the next Fed Chair.

Jerome Powell has cultivated strong connections in Congress and came out defiant in response to the DOJ statement.

“This is about whether the Fed will be able to continue to set interest rates based on evidence and economic conditions—or whether instead monetary policy will be directed by political pressure or intimidation.” Jerome Powell, 11 January.

However, later in the month at the FOMC meeting, Powell was business as usual and refused to get distracted by politics.

The US economy remains a paradox. From a slight upward revision in GDP growth to 4.4% annualised for the September quarter: the fastest in two years, to the lowest consumer confidence level since May 2014: worse even than during the pandemic (see chart below),it is hard to make sense of the US economy at the moment. Maybe the “K” in K-shaped recovery stands for “konfused”! Another government shutdown, albeit partial, probably won’t help.

With the Fed’s preferred inflation measure, PCE, relatively stable (see chart below) and unemployment growth still weak (only 50,000 jobs added in December), some wondered if Stephen Miran could talk the FOMC into another cut in January. But Powell is happy for the 75 bps in total cuts across September, October, and December last year to flow through to the economy before cutting further. Miran looks like he will stay on in the FOMC until a replacement is found.  He may have better luck with a cut when Warsh becomes chair in May.

Miran, however, should be happy about the falling USD, with the US Dollar Index falling 2% in January, after falling 9.4% in 2025. Miran believes that a strong USD has hurt the competitiveness of US industry for decades. The US Treasury supposedly even stepped in during the month to help the BoJ when it saw the yen fall too far against the dollar - Treasury Secretary Scott Bessent denied it.

As the dollar weakened, gold and silver continued to climb, but Trump’s announcement of Warsh for Fed Chair struck fear into the froth of gold and silver speculation (see chart below). Quick Google searches on Warsh’s time on the FOMC during the global financial crisis seemed to suggest a hawk! However, a hawk is not what Trump is expecting.

Concerns over an AI bubble were muted by everything else. Alphabet continued to perform strongly on the back of good press for its Gemini model in late November, and Meta’s stock recovered after a favourable reaction to its quarterly earnings. Questions over the sustainability of capex spending remain and dogged Nvidia and other tech stocks. 

China

China met its 5% GDP growth target for 2025 with exports providing its biggest contribution since 1997. China also recorded a record trade surplus for 2025 with USD 1.2 trillion - so much for a US trade war!

However, the December quarter grew at the slowest pace since the pandemic lockdowns.

According to the South China Morning Post, the government is considering a lower growth target for 2026. Such a step down could be seen as a loss of face for the government, with this leaked report testing the waters.

There are also reports that the government has relaxed its “three red lines” borrowing requirements on property developers. Introduced in 2020, the restrictions ironically triggered increased anxiety over the property market.  

After rising slightly in December, the manufacturing PMI decreased sharply in January. Despite the strength of exports last year, the economy is still struggling.

EU

Apart from the palpitations of transatlantic relations, the Euro area was steady as it goes in January. Inflation fell to 1.9% in December on an annual basis, unemployment fell to 6.2%, and GDP increased by a steady 0.3% in the December quarter on a quarterly basis.

Germany bounced back from -0.2% and 0% GDP growth in the June and September quarters to 0.3% for the December quarter.

Japan

Japanese Prime Minister Sanae Takaichi called a snap election on 19 January to be held on 9 February. Takaichi is banking on her personal popularity to give the LDP an elusive majority. In response to the election call, bond vigilantes dumped Japanese bonds (see chart below) and the Yen slumped.

After many monotonous years, exciting times are back in Japanese financial markets. Between inflation, rising interest rates, and Abenomics 2.0, it seems we are transitioning to a new era. It may not be a smooth ride, particularly if the tsunami of Japanese money overseas returns home at some point!

UK

The BoE is caught between rising unemployment and too-high inflation. Unemployment increased to 5.1% in the November quarter, while inflation increased from 3.2% in November to 3.4% in December. Past BoE interest rate decisions have routinely been split, but with a tendency to favour growth over addressing high inflation. The BoE believes the high inflation is temporary.

New Zealand

The New Zealand economy may have stabilised. Inflation increased slightly from 3% in the September quarter to 3.1% in the December quarter. This follows the strong 1.1% rebound in GDP in the September quarter, on a quarterly basis.  

What this means for Australian Private Debt

The Australian economy is performing stronger than anticipated, and given the supply constraints, this has translated into increased inflationary pressures. While interest rates are heading down elsewhere, they are likely to move higher in Australia over the first half of the year. Once again, holders of Australian private credit can enjoy a nice return from a strong economy.