Australia’s labour market remains incredibly tight with few signs of any cracks. The reduction of 2,500 jobs across the country in May is insufficient to cause policymakers to clutch for their worry beads. This outcome followed the strongest back-to-back gain in more than a year of 113,200 jobs (across March and April). Furthermore, the national unemployment rate has stayed steady at 4.1% for the fifth straight month. In fact, it has barely budged far from this low rate in the past fourteen months, an astonishing feature of the Australian labour market amid an economy that is experiencing sluggish activity.
A breakdown of the data suggests the job losses were centred in New South Wales and Victoria, our two largest states. They account for 57% of the nation’s workforce and collectively dropped almost 39,000 jobs in May. The unemployment rates in these two states also ticked higher, to 4.1% and 4.4%, respectively. The jobless rates remain low in these states, but warrant watching over the next few months.
Forward-looking indicators of jobs, such as the job advertisements series, suggests solid jobs growth can continue and sustain an ongoing tight labour market. But employment is also a lagging economic indicator and with economic activity just toddling along, there’s some risk of the unemployment rate ticking higher in time.
Outside of global economic concerns, the Reserve Bank of Australia (RBA) is intently watching two key areas of the economy – jobs and consumer spending. Jobs growth remains strong. However, consumers are shackled by caution, contributing to a stalling of household spending growth. Indeed, on a per capita basis, retail spending volumes went backwards in the last quarter, following a brief and modest recovery late last year. Nominal spending values also shrunk in April ahead of the rate cut in May. Consumers remain pessimistic and business confidence in recent months has been on shakier footing.
Amid these domestic considerations, the Israel-Iran conflict has deepened global economic uncertainty, compounding the darkening outlook for world growth from US tariff policies. An immediate impact has been felt in the price of crude oil. The West Texas Intermediate price of crude oil has risen by over 10% since Thursday’s close last week. A sustained increase in crude world prices could push up inflationary pressures through increases in fuel, transportation and energy costs. But it also dampens consumer spending growth, as higher prices at the petrol pump leave less money in consumers’ pockets. The key risk factor for sustained higher oil prices is geopolitical escalation in the Middle East, particularly any disruption to the Strait of Hormuz. This narrow waterway is critical to global oil supply with approximately 20% of the world’s petroleum liquids passing through it daily. Iran exports around 2 million barrels per day, but capacity from the Organisation of Petroleum Exporting Countries (OPEC) can be boosted by around 6 million barrels per day relatively quickly. A wider escalation and disruptions to the Strait of Hormuz are key.
The RBA last met in May and cut the cash rate by a quarter a percent. However, the Board had deliberated over a larger half a per cent cut, which suggests more easing should be on the way unless momentum in the economy significantly improves to its July Board meeting. It has not.
We continue to expect the RBA to cut the cash rate for a third time this year by a quarter of a per cent at its next Board meeting on 8 July. We also continue to forecast the cash rate will fall to 3.10% by the end of this year, which should help stimulate economic growth over 2026.
The information in this article is general in nature, intended for informational purposes only and does not constitute financial, investment, legal or professional advice; readers should seek guidance from qualified professionals before making decisions based on its content.
