Early-year volatility in labour force data in recent years, however, suggests some caution may be warranted in not overinterpreting recent labour force data.

It has been floated that a potential reason for that volatility after the pandemic was because of relatively large spikes in the number of non-employed future job starters early in the year. These are people waiting to start a job but counted as either unemployed or outside the labour force. Indeed, the unemployment rate rose in January in each of 2023, 2024 and 2025 by more than 0.1ppts before falling thereafter.

Helpfully, the ABS again published analysis on monthly “job attachment” as it has alongside January labour force data since 2023.

Our focus here is to gauge whether changes in the number of future job starters, particularly around the start of the year, have temporarily influenced reported employment and unemployment.

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The 0.2ppt jump in Australia’s unemployment rate in September to a little under 4.5% has received significant attention, including because it now sits above the the RBA’s forecast profile which flatlines at 4.3%.

The ABS notes that the standard error of monthly changes in the unemployment rate is 0.1ppts. But larger moves are relatively common.

A key question is how much signal is contained in the higher jobless rate in September?

We looked at how common large moves in the unemployment rate have been over time and what happened in the following month.

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We have just been through a dry run of the communication challenges that may arise for the RBA during the transition to the full monthly CPI which will begin later this year, starting with the release of the October CPI.

The RBA’s focus is typically on underlying inflation, specifically the trimmed mean.

The recent episode showed that when commentators and some economists only peruse high-level monthly inflation data they can get the wrong end of the stick.

As outlined in yesterday’s RBA Board Minutes, “the sharp declines in the monthly indicators for headline and trimmed-mean inflation were likely to have overstated the easing in underlying inflation momentum”. In part this reflects that the monthly trimmed mean indicator is calculated at an annual level using data in original terms whereas the preferred quarterly measure trims quarterly seasonally adjusted CPI sub-component data.

Moreover, as we flagged a month ago in our Q2 CPI Preview, the Minutes noted that “movements in components of the monthly CPI data that contained new information suggested that underlying inflation in the June quarter could be slightly higher than the staff had forecast in May”.

It was very apparent that this point was initially missed by those that don’t dig into the detail of the monthly CPI.

Tricky transition period for the monthly CPI

The ABS has moved mountains to get a monthly CPI up and running from later this year and deserves a pat on the back. Eventually, the monthly CPI will be very useful for the RBA and RBA watchers alike.

We say eventually because for at least the initial 18 months after the monthly CPI’s introduction, we could see periods where interpretations of the CPI data could vary markedly, potentially creating communication issues for the Bank.

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Australia’s Q2 CPI is keenly anticipated by RBA watchers given the importance placed upon the full quarterly report by the Governor following the last Board meeting.

Our Q2 CPI preview published on 25 June following the May monthly CPI flagged that underlying inflation in Q2 looks to have been a bit above the RBA’s May SMP forecast - the Governor confirmed that Bank staff arrived at the same view, reiterated in the Board Minutes.

Past the near-term, we also highlighted a risk to the market path for the cash rate is that the disinflationary impulse from the housing components of the CPI are unlikely to be as favourable going forward.

CPI housing inflation and trimmed mean CPI inflation are highly correlated. Significant disinflation in the housing components of the CPI have supported the decline in underlying inflation (see chart).

BUT trimmed mean inflation has only fallen to around the mid-point of the RBA’s 2-3% target even with this substantial CPI housing disinflation.

Below we outline why CPI housing disinflation could be over for now.

This raises the risk that broader underlying inflation could struggle to remain anchored around 2.5% unless other sources of disinflation become stronger.

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Australia’s labour market conditions have been relatively resilient over the past year, but question marks have persisted about whether that outperformance can be sustained against the backdrop of typically-deteriorating labour market conditions elsewhere.

The weak June labour force report - with the unemployment rate rising 0.2ppts in the month - could be a sign that Australia’s labour market outperformance is waning.

But it’s one data release and it’s known as the monthly lottery for a reason.

Firstly, since the monthly labour force release began in 1978, the monthly change in the unemployment rate has, on average, been at least 0.2ppts in 1 in every 4 reports.

Secondly, there is some weird stuff under the hood in the recent labour force report(s).

In particular, 15-24 year olds contributed significantly to the rise in aggregate unemployment in both June and over the June quarter.

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The Government had portrayed it as “The Growth Budget”, but it is uninspiring for those concerned about structural issues like weak productivity growth. For instance, a new accelerated depreciation initiative for businesses is only expected to increase real GDP by up to 0.4% over the forecast horizon.

At least for economists, announced funding for a monthly CPI and other monthly indicators will elicit some excitement.

The Government had already flagged that most new (operational) initiatives would be funded by making savings elsewhere in the budget (see table).

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We have analysed scheduled wage increases in 542 Federal Enterprise Bargaining Agreements (EBAs) approved by Australia’s Fair Work Commission in the March quarter of this year.

Why do this?

EBAs account for ~35% of Australia’s wage price index and with an average term of ~3 years can instil some momentum in aggregate wages growth. The latest available EBA data also showed a large jump in average contracted wages growth in coming years so we wanted to dig deeper to investigate.

Quarterly summary data for EBAs are published by the Department of Education and Workplace Relations (DEWR) but these data have limitations. First, they are published with a long lag. Secondly, only average annualised wages growth across the total duration of EBAs approved in a quarter is published.

Importantly, the DEWR data do not provide an annual profile for average wages growth in newly approved EBAs. Therefore, we cannot gauge if EBA wages growth is typically expected to strengthen or moderate over time.

For example, the DEWR data showed a sharp jump in the average annualised wages growth in newly approved EBAs to 4.8% in Q4 2024 (see chart). Closer inspection, however, revealed that one agreement - the Victorian Public Sector Nurses & Midwives EBA - accounted for a sizeable share of that increase.

Further, while average annualised wages growth in the Victorian Nurses EBA was 6.7% for the period covered to 2028, this included a large wage rise of 9.4% in the final year of the agreement. That is not relevant for gauging the nearer-term outlook for wages growth and annual wage increases in the Victorian Nurses EBA are ‘just’ a little more than 4% for the coming 2 years.

This example shows the importance of more granular detail on EBAs to get a better feel for typical wage increases in newly approved EBAs and the annual profile of those increases.

That is our focus here.

A challenge of tracking wages growth in newly approved EBAs, however, is the sheer volume of EBAs the Fair Work Commission approves each quarter - 935 were approved between 1 January and 24 March this year! The EBAs do not have a standard format and extracting wages growth from each agreement is labour intensive.

We trawled through 543 EBAs approved in the March quarter.

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The Australia Government released Budget 2025-26 tonight.

This is a Budget that almost never was until Cyclone Alfred reportedly derailed the Government’s plans for an April federal election. As such, a full Budget had to be issued and a May election is expected to be called soon.

With an election looming, the Government is trying its best to keep the outlook for never-ending (structural) budget deficits on the down-low. Their pitch is that it could have been a lot worse.

Not that the Opposition is striving to do much different, with the Shadow finance minister saying that they would “try and get us back to a structural surplus, or structural balanced budget over the medium term”.

The Budget is being delivered against a backdrop of significant geopolitical and economic uncertainty. Growth in the global economy slowed amid the increase in uncertainty and relatively targeted tariffs of Trump 1.0. The US Administration appears to be significantly more interventionist under Trump 2.0 and accommodating of at least a short-term hit to economic activity.

The focus of the Australian Government in the Budget is firmly on health care and cost of living relief - extended electricity rebates, cheaper medicines, more GP bulk-billing, modest income tax cuts - given focus groups and polls show this is still by far the top issue among voters in Australia.

On the reform front, the Government will ban the use of non-compete clauses for workers earning up to $175,000 annually. These clauses reduce worker mobility and hence their ability to shift into higher-paying jobs.

Otherwise, there is again no hint of any appetite to undertake meaningful policy reform. That’s not just a sleight on the Government (and Opposition), but voters won’t allow it.

For more than 20 years now - arguably longer - voters in Australia have had a "no losers” mentality for any policy changes. That is a by-product of how well-off Australians have become courtesy of an extended period of very high commodity prices and incomes (even allowing for recent real income stagnation).

Aging demographics have also played a role as politicians pander to the growing group of older voters, including by under-taxing superannuation and other wealth.

Without meaningful reform, the budget’s reliance on income tax as a source of revenue will only increase further, as it is expected to in tonight’s Budget.

Our fear is that proper tax and other policy reform will only happen when voters are convinced by an economic downturn that reforms are necessary. Better to do it when the sun is shining.

Look over there…

The key fiscal aggregates in the Budget were little changed in the near-term compared with those in MYEFO. From the late 2020s, however, projected budget deficits were revised to be larger and the government debt profile lifted. But that’s in the never never…

In a world of high uncertainty, however, the starting point for net debt of the Australian Government - just ~20% of GDP - is an enviable one.

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This piece is about our struggles to come close to fully explaining the strength in Australia’s labour market.2

On the one hand, it is clear that the recent composition of GDP growth - led by robust growth in government spending - has supported overall jobs growth (and indirectly exacerbated skills shortages in some industries).

But trying to quantify this compositional effect on employment growth is another matter.

We ran several different employment models and the results were mostly underwhelming. We provide a few reasons for what we might be missing.

Following a period of robust jobs growth, and weak labour productivity growth, we remain wary that jobs growth may eventually underwhelm despite the expected cyclical pick-up in (private) demand growth.

Non-market industries as a key driver of jobs growth

The data paint a clear picture on the sources of jobs growth.

It is now well-understood that so-called non-market - or government-aligned - industries have contributed significantly to growth in both jobs and hours worked in recent years, with health care & social assistance the standout.3

These are not all public-sector jobs per se but these industries are heavily influenced by government spending and decisions.

Since Q1 2018, non-market industries have accounted for more than half of total jobs growth despite comprising ~30% of jobs in Australia. It’s a very similar story for growth in hours worked over this period.

It is undeniable that strength in government spending - including on aged, disability and other health care - has contributed to robust non-market sector jobs growth.

Since 2015-16, spending on social protection - including disability and aged care spending - rose from 11.5% of total government consumption to 17.7% in 2023-24 and has risen noticeably as a share of GDP.

But the increase in government spending has also supported labour demand in the market sector (despite recent sluggishness in market-sector jobs growth).

For example, while a significant share of NDIS spending is on disability carers and other health care workers, it also contributes to construction and home modification activity, demand for transport, retail and recreation activity, the bureaucracy, and so on.

Strong government demand is also likely to have contributed to labour shortages in some market-sector industries by increasing overall demand for labour. Anecdotal evidence strongly suggests that this has been the case in the construction industry, with robust infrastructure demand sucking labour away from other types of construction activity.

Consequently, the job vacancy rate in market-sector industries remains well above pre-pandemic levels despite weak jobs growth overall in the market sector.

A standout is the hospitality sector where the job vacancy rate remains more than twice as high as pre-pandemic rates despite no growth in real spending on eating out & takeaway for more than 2 years!

It is highly plausible that very strong demand for relatively well-paid caring roles has made it more difficult for the hospitality industry to retain and attract workers (despite very strong net immigration).

In summary, there is ample partial and circumstantial evidence that robust growth in government spending has supported jobs growth in some industries and is likely to have exacerbated skills shortages in other industries (i.e. ‘crowded out’ some jobs growth).

But this doesn’t help us quantify the aggregate employment effect of strong government spending. It also doesn’t get us close to accurately gauging how important changes in the composition of GDP growth have been for the strength in jobs growth.

So we tried a more structured approach using some (relatively simple) modelling.

Can modelling help us understand the resilience of jobs growth?

Standard employment models attempt to explain jobs growth using a combination of output and real wages growth as explanatory variables. We attempted several variations.

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Despite the best efforts of the Government to sugar coat its fiscal strategy, it is struggling to set the budget on a sustainable path. It’s certainly not a disaster from a global perspective, with net government debt still low.

But policy decisions again worsen the budget outlook even before the inevitable pre-election promises are wheeled out (from both sides). Structural pressures on the budget will only become stronger.

Adding in the latest budgets (or mid-year updates) of the state governments reveals quite the deterioration in Australian government finances at a time when the unemployment rate is at a very low level.

Deficits as far as the eye can see

The Australian Government expects to record an underlying cash budget deficit equivalent to 1% of GDP in the current fiscal year to 30 June 2025. Cumulative budget deficits of $117b (1.3% of GDP) are then pencilled in for the following three years, $23b more than at Budget.

Government borrowing to rise even more

The headline cash budget balance, which adjusts the underlying balance for net cash flows from investments in financial assets for policy purposes, is expected to be much larger than the underlying measure.

Australian governments have found nifty ways to stash spending ‘off balance sheet’ which are excluded from the underlying cash balance. These have risen again at MYEFO (see chart).

But this spending is included in the headline cash balance which, in our view, is again becoming a better measure to assess how much the Government needs to borrow.

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Fast forward to now and the mid-year budget update (HYEFU) shows larger fiscal deficits and higher government debt in coming years. This has largely resulted from the economy being weaker than anticipated by Treasury, notwithstanding that real government consumption not being as weak as previously forecast by Treasury.

With interest rates falling, Treasury unsurprisingly forecasts a strong pick-up in New Zealand’s GDP growth in 2025-26 and a decline in the unemployment rate, though this follows forecast further deterioration in the near term.

One thing Treasury got mostly right, however, was they anticipated a faster fall in CPI inflation than the RBNZ had forecast earlier this year. The HYEFU forecasts again envisage a weaker headline inflation profile than assumed in the RBNZ’s November MPS.

Budget is in a worse position…

The NZ Government’s budget is in worse shape than thought back at the May Budget.

Measures of the budget balance were in larger deficits last fiscal year than previously forecast and the outlook has also deteriorated.

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Very high commodity prices and the terms of trade are Australia’s Achilles heel.

But forecasting the terms of trade has been a mug’s game for a long time. Even significant weakness in China’s steel-hungry property sector has only put a relatively modest dent in Australia’s terms of trade.

If, and when, the terms of trade do decline, it is clear to us that this will spur much faster productivity growth than what has been the norm recently in Australia.

The problem is that the accompanying weakness in national income would be the PRIMARY issue. Business profitability would decline, necessitating a sharper focus on efficiencies and costs. Governments would be under pressure to curtail spending against an unfamiliar backdrop of downside revenue surprises, making the economic pain worse.

Many private-sector firms have already turned to a focus on costs, with private labour cost growth already slowing noticeably and market-sector labour demand weak. A sharp decline in the terms of trade would lengthen this process. For now, it remains in the risk bucket.

Our analysis is broken down into three parts:

• first, we link developments since the early 2000s in Australia’s terms of trade, labour productivity and government spending.

• second, we outline fluctuations in labour productivity trends through an industry lens - mining vs non-mining - since the early 2000s.

• third, we show that weak labour productivity growth in recent years has been accompanied by weak growth in real (producer) wages. We argue that this has helped to sustain resilient employment growth.

Terms of trade boom 2.0

Australia’s terms of trade - the ratio of export to import prices - is again at a very high level, boosted by high commodity prices. Only Chile matches Australia’s terms of trade boom since the early 2000s.

While Australia’s terms of trade has declined from the record high reached in 2022, it remains only a little below the previous peak set in 2011 which resulted from China’s massive stimulus in response to the Global Financial Crisis. As the effects of that stimulus waned, so did prices for Australia’s key commodity exports and terms of trade for several years thereafter.

Why does this matter? A high terms of trade increases a country’s collective purchasing power. Measures of Australia’s real national income - as opposed to real GDP - have again benefited from the significant increase in the terms of trade, rising 26% since 2016 compared with just 18% for real GDP.

Disincentivising productivity gains and fiscal discipline

Like during the initial ‘free kick’ to Australia’s real income from 2003 to 2011, the more recent terms of trade boom has again been accompanied by a slowing in Australia’s productivity growth and looser fiscal settings.

While there are many other reasons why productivity growth has slowed in Australia and globally, it is clear in our view that Australian businesses - including in the non-mining sector - have not been strongly incentivised to strive for efficiency gains because of relatively strong growth in income (at least compared with the counterfactual scenario). That ‘free kick’ again.

The 2003-11 terms of trade boom coincided with a sharp slowing in Australia’s labour productivity growth to under 1% per annum, on average. Amid the decline in the terms of trade from 2011 to 2016, average annual productivity growth again strengthened to 1.6%. Since then, productivity growth has weakened significantly alongside the surge in the terms of trade.

Comparing the paths for labour productivity and terms of trade between Australia and the United States is striking.

Australia’s weak productivity performance relative to the United States began at the same time that the terms of trade of each economy went on divergent paths. It would be a huge coincidence if they were not linked.

While Australia’s productivity growth since 2003 has been relatively slow, real national income per capita has outpaced that of the United States. Again, that ‘free kick’ at work from the high and rising terms of trade.

Similarly, Australian governments have not been strongly incentivised to rein in robust government spending amid persistent upside surprises to government revenue growth which has accompanied strong growth in national income.

Government spending has risen significantly as a share of Australia’s economy since the early 2000s - when the terms of trade started rising rapidly - but has increased most strongly since around 2016.

The strong growth in government demand in recent years has been most prominent in health and aged and disability care spending. Some have argued that this can partly explain the weakness in Australia’s productivity growth, as those sectors typically have low labour productivity.

We don’t disagree, but would add that very strong growth in spending on the NDIS, for example, has largely been allowed to happen because there has not been an urgency to really put the brakes on when growth in government revenue has consistently surprised to the upside amid the second leg higher in the terms of trade.

One doesn’t need to go far to see evidence of government profligacy. Cumulative (net) policy decisions made by Australian governments over the past 18 months or so have been significant.

Excluding increases to government investment programs, net policy decisions have been the equivalent of 1.2% of GDP for the fiscal year just ended, and nearly 1.6% of GDP for the coming year. That is significant.

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Share prices for several consumer-facing companies have performed well, in part because analysts’ pessimism hasn’t been borne out in company results. The S&P/ASX Consumer Discretionary index is at an all-time high.

Some consumer discretionary stocks have risen because of relatively positive updates on recent trading conditions and/or expectations of better trading conditions ahead.

While the consumer discretionary share price index has risen by ~20% since end-2023, it has been a far from even performance across major stocks.

Let there be no doubt, consumption growth has been weak…

In what looks like a contrast, economists have been highlighting the weakness in (real) consumer spending growth in Australia for well over a year.

Growth in (real) household consumption in Australia has been well below the pre-pandemic decade average and consumer confidence in Australia remains relatively weak.

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Very high commodity prices and the terms of trade are Australia’s Achilles heel.

But forecasting the terms of trade has been a mug’s game for a long time. Even significant weakness in China’s steel-hungry property sector has hardly dented Australia’s terms of trade.

If, and when, the terms of trade do decline, it is clear to us that this will spur much faster productivity growth than what has been the norm recently in Australia.

The problem is that the ensuing weakness in national income would be the primary issue. And governments would be under pressure to curtail spending against an unfamiliar backdrop of downside revenue surprises, making the economic pain worse.

For now, it’s in the risk bucket. Fingers crossed.

The first part of this piece takes a high-level look at developments in Australia’s terms of trade, labour productivity and government spending.

The second part looks at fluctuations in labour productivity trends through an industry lens - mining vs non-mining - since the early 2000s.

Finally, we show that weak labour productivity growth in recent years has been accompanied by weak growth in real (producer) wages. We argue that this has helped to sustain resilient employment growth.

There is a growing risk, however, that many firms are quickly turning to a focus on costs, with private labour cost growth already slowing noticeably. Employment could be more clearly next in the firing line, particularly outside government-supported industries.

Terms of trade boom 2.0

Australia’s terms of trade - the ratio of export to import prices - is again at a very high level, boosted by high commodity prices. Only Chile matches Australia’s terms of trade boom since the early 2000s.

While Australia’s terms of trade has declined from the record high reached in 2022, it remains close to the previous peak set in 2011 which resulted from China’s massive stimulus in response to the Global Financial Crisis. As the effects of that stimulus waned, so did prices for Australia’s key commodity exports and terms of trade for several years thereafter.

Why does this matter? A high terms of trade increases a country’s collective purchasing power. Measures of Australia’s real national income - as opposed to real GDP - have again benefited from the significant increase in the terms of trade, rising 27% since 2016 compared with just 18% for real GDP.

Disincentivising productivity gains and fiscal discipline

Like the initial ‘free kick’ to Australia’s real income from 2003 to 2011, the more recent terms of trade boom has again been accompanied by a slowing in Australia’s productivity growth and looser fiscal settings.

While there are many other reasons why productivity growth has slowed in Australia and globally, it is clear in our view that Australian businesses - including in the non-mining sector - have not been strongly incentivised to strive for efficiency gains because of relatively strong growth in income.

The 2003-11 terms of trade boom coincided with a sharp slowing in Australia’s labour productivity growth to under 1% per annum, on average. Amid the decline in the terms of trade from 2011 to 2016, average annual productivity growth again strengthened to 1.6%. Since then, productivity growth has weakened significantly alongside the surge in the terms of trade.

Comparing the paths for labour productivity and terms of trade between Australia and the United States is striking.

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The Bank forecasts the unemployment rate rising to just 4.3% - from 4% currently - and flatlining there.

That is the RBA’s current central estimate of the NAIRU, though there are wide error bands around that estimate and the interaction between inflation and unemployment in recent years argues that the NAIRU could be higher.

Only time will tell whether this envisaged ‘fortuitous’ landing is achievable alongside a return of inflation back to 2.5%. We are sceptical.

But, from a labour market perspective at least, so far so good.

The share of the working age population in employment is not far off an all-time high, and while the unemployment rate has risen 0.5ppts, that was from a near-50-year low.

Australia’s labour market conditions have also been some of the most resilient among advanced economies. The employment-to-population ratio has moved sideways at an historically high level compared with declines elsewhere (the US is a notable exception).

From a different perspective, the rise in Australia’s unemployment rate has been relatively modest compared with the increases in other economies with high household debt.

In part that could reflect that those other economies have typically had pronounced weakness in residential construction activity.

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There are several possible explanations for this. First, GDP growth may have been understated. Secondly, the composition of output growth may be skewed towards more labour intensive parts of the economy. Third, firms may still be hoarding labour post-pandemic and/or rebuilding workforces in some industries. Finally, Australia has a real productivity problem.

The composition of growth appears to be playing a role. In particular, strong government spending - including on health and education - is supporting robust growth in employment and hours worked in related industries.

In contrast, employment growth in ‘market’ industries has been more muted, and hours worked has barely increased for more than 18 months.

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Treasury argues that fiscal policy is tightening over the coming four years and that “decisions taken through Budget 2024 will on balance reduce the contribution fiscal policy is making to inflation pressure”. In fact, Treasury forecasts a noticeably faster decline in CPI inflation this year than the RBNZ recently published.

But this conclusion relies rather heavily on the assumption that in future Budgets the Government will stick to large reductions in allowances for new spending and will be able to achieve the significant savings measures outlined in the Budget.

NZ Treasury says there are hard choices ahead.

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This can provide a quick insight into the likely economic impact of the Government’s discretionary policy decisions (compared with the budget effects of underlying changes in the economy and program-specific para…

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There was no bounce-back in measured employment following the sharp decline in December, and the unemployment rate rose to a 2-year high of 4.1%.

But part of this is likely to be noise.

The ABS published analysis on “job attachment”, in part as a warning to not read too much into the ‘surprising’ outcomes in the January data.

Notably, the ABS highlighted that:

“… the increase in the number of unemployed future starters [in January] is important to consider when interpreting the increase in the seasonally adjusted estimate of unemployment”.

This has been an issue for the past couple of years when interpreting labour force data early in the year.

We show that the number of (seasonally adjusted) unemployed Australians still would have increased in January after accounting for unemployed future starters.

BUT the increase was much more gradual than the rise in the published measure of unemployment.

Similarly, we estimate that the recent weakness in published employment is overstated. But the underlying trend is a clear slowing in employment growth.

While our view remains that labour market conditions are slowly easing, January’s labour force data overstate the rate of that easing and some payback is a high possibility in the February release.

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Next Tuesday’s RBA Board decision is an ‘on hold’ no-brainer. The Bank will publish updated forecasts in the overhauled Statement on Monetary Policy at the same time as the policy decision. We expect the new SMP format to be more concise and punchier than previously.

The Bank’s near-term underlying inflation forecasts are likely to be lowered a little, but we doubt the forecasts further out will change much.

It’s time, however, in our view for the Board to drop this language from the post-meeting statement and suggest that they have done enough:

“Whether further tightening of monetary policy is required to ensure that inflation returns to target in a reasonable timeframe will depend upon the data and the evolving assessment of risks.”

Our view is the RBA Board will keep the cash rate at 4.35% for a while now and until there are clearer signs of labour market deterioration. Labour market conditions continue to gradually ease but the level of spare capacity remains relatively modest.

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