Key insights from the week that was.
In Australia, the August labour force survey validated the judgement that the labour market is softening once again. The three-month average pace of employment growth has decelerated to 1.8%yr, down from 2.5%yr in February. Underlying the headline trend, growth in ‘care economy’ employment has throttled back from its rollicking pace, while the market sector is slowly recuperating. A fall in participation allowed the unemployment rate to hold steady at 4.2% in August, but an upward drift is likely in coming months. While the downtrend in underemployment is seemingly at odds with the broader trend, this appears to be tied to a shrinking part-time share of total employment growth not an increase in labour utilisation by employers.
The August report is unlikely to shift the calculus for the RBA, with the Bank having already acknowledged that labour market conditions have “eased slightly” in its August decision communications. Westpac continues to expect the next RBA rate cut to be delivered in November, followed by two additional 25bp cuts in the first half of 2026.
Before moving offshore, a final note on the domestic manufacturing sector. The Q3 Westpac-ACCI Survey of Industrial Trends revealed conditions in the sector deteriorated into the second half of the year, the Actual Composite slipping from 51.5 in Q2 to a contractionary read of 48.8 in Q3. This is consistent with private sector demand tracking a gradual but patchy recovery – with falling orders and weak output. Despite this, manufacturers’ optimism over the outlook is unwavering – the Expected Composite currently sits at an elevated 58.1. There is a risk these strong expectations are not met, especially if the economic recovery remains sluggish and uneven.
Over in New Zealand, GDP surprised materially to the downside in Q2, declining 0.9% in the quarter to be 0.6% lower over the year (WBC f/c -0.4%, -0.1%yr). Our New Zealand Economics team believe the RBNZ are likely to assess there is too much excess capacity in the economy and consequently accelerate the final stage of the easing cycle to counter the trend. The RBNZ is now forecast to cut by 50bps at their October meeting and a further 25bp in November to 2.25% (previously we expected two 25bp cuts to a low of 2.50%). The trough rate for policy is expansionary, and so momentum should pick up into 2026. Monetary policy will likely need to be rebalanced from late-2026, but the precise timing will depend on the pulse of the economy over the coming 6-12 months.
Further afield, the focus was on major central banks.
The FOMC cut the fed funds rate by 25bps to a mid-point of 4.125% as expected at the September meeting. The guidance in the statement and press conference made clear that risk management is the Committee’s priority, while the revised forecasts highlighted the degree of uncertainty that remains over the outlook. On a median basis, the updated forecasts are sanguine and consistent with monetary policy being effective in managing inflation and demand. GDP growth has been revised up. It is now only expected to be below trend in 2025 at 1.6% then at trend through 2026-2028, circa 1.8%. The unemployment rate is consequently forecast to peak at just 4.5% in late-2025 before edging lower through 2026-2028 to the ‘longer run’ full employment rate of 4.2%. Inflation is not expected to hinder the FOMC’s ability to manage demand risks, with PCE inflation forecast to abate from around 3.0% at end-2025 to 2.6% by late-2026 then 2.1% at the close of 2027. While the return of inflation to the medium-term target over the forecast period is ‘by design’, taken together the activity and inflation forecasts signal the consensus view of the Committee is that tariff’s effect on inflation is a one-off and that services inflation will continue to abate. This would allow the fed funds rate to be cut to 3.4% at end-2026 and 3.1% by end-2027 – a broadly neutral rate – on the FOMC’s expectation.
We see conflicting risks to the FOMC’s forecasts, believing that economic growth and the labour market are likely to come in weaker than the Committee are forecasting for 2025-2027, but also that inflation will show greater persistence. In the absence of recession, this mix is arguably most likely to result in a need to hold to a modestly restrictive stance through the forecast horizon. Whether our current 3.875% low for the cycle or a rate closer to neutral is seen over the coming 12 to 18 months will depend on the trajectory of the respective labour market / inflation trends away / to the FOMC’s mandate. Only the data flow will be able to adjudicate on progress and guide on the evolving risk outlook.
North of the border, the Bank of Canada also cut rates by 25bps to 2.50% as tariffs continue to affect activity while inflation pressures abate. The Governing Council assess that “shifts in trade continue to add costs”; how this dynamic impacts activity and inflation will determine future policy steps.
Across the pond, the Bank of England deliberated on the latest labour market and inflation data and decided to hold the bank rate at 4.0% in a 7-2 split decision. The statement suggests the MPC remain attuned to upside inflation risks – both “existing or emerging”. The August CPI gave support for this approach, price growth accelerating to 0.3% in the month while the annual figure remained at 3.8%. Services inflation remains stubbornly near 5.0%yr, printing at 4.7%yr in August.
The MPC will continue to take a ‘gradual and careful’ approach to further easing, with the timing to depend on progress with disinflation and downside risks to activity. We view a one cut per quarter pace as a fair expectation; though, if inflation remains sticky, there is a risk of the November cut being delayed. The MPC also decided to slow the pace of quantitative tightening in their annual review; members now expect to reduce the balance sheet by GBP70bn a year from GBP100bn previously. Of the GBP70bn, around GBP21bn will be through active sales and the rest through bonds maturing. The decision follows volatility in Gilt markets and a similar decision by the Bank of Japan earlier this year.
A final point on China. This week’s August data round highlights that, while continuing to experience success with trade and despite burgeoning equity market momentum, consumer-related sub-sectors of China’s economy remain weak and susceptible to downside risks. Most notably, new home prices declined again, continuing a 27-month long trend, and property investment’s contraction accelerated, now down 12.9%ytd. The year-to-date gain for total fixed asset investment also deteriorated to just 0.5%, well down on 2024’s 3.3%. Note, this outcome is only partly due to the moribund state of housing construction; key high-tech manufacturing sectors have pulled back on current investment following rapid expansion over recent years, their focus now turning to the effective and profitable implementation of new capacity. At this stage in China’s economic development, continued rapid growth in new manufacturing capacity is unsustainable; equally, the contribution from trade must moderate. As such, it is important October’s Plenum deliver a consumer centric five-year plan for 2026-2031, with an immediate focus on ending property price and investment declines and means to fuel confidence over future income growth. Without such steps, GDP growth in the mid 4%’s from 2026 will likely prove unsustainable, as discussed in our September Market Outlook.
