Key insights from the week that was.
After an upside surprise in June, the labour force survey disappointed in July, reporting a loss of 15.8k jobs. This leaves average monthly employment growth year-to-date at 20.8k, above 2025’s 12.6k but below the pace needed to keep the unemployment rate unchanged. It is therefore unsurprising that the unemployment rate continued to edge higher, reaching 4.5% in July, 0.4ppts above its level at the turn of the year. Hours worked also disappointed, declining 0.6% in the month to be up just 0.2% over the year. Slowly but surely, slack is forming in the labour market, weighing on activity growth but supporting the disinflationary trend. That trend must be sustained if the next move in the cash rate is to be down as Westpac forecasts, albeit not until next August.
The Q2 wage price index was also favourable for the inflation outlook. As expected, the headline wage price index rose 0.8% in Q2 to be 3.2% higher over the year. Private sector wage growth is now at its weakest since Q4 2021 (0.7%qtr, 3.1%yr). Public sector wage momentum provided an offset in Q2, gaining 0.9%qtr and 3.4%yr. The detail suggests that a larger share of public sector jobs received a wage increase than a year ago (25% versus 20%), but that the average hourly wage increase for those jobs was smaller (3.1% versus 3.5%).
Australian consumers are becoming more aware of labour market risks, with the Westpac-MI consumer sentiment survey unemployment index rising above its long-run average in August. But the cumulative impact of cost-of-living pressures remains the major impediment to confidence: both “family finances versus a year ago” and “family finances next 12 months” stayed below average in August, despite mortgage holders receiving a welcome reprieve from the RBA. And improved comfort around family finances is only the first step towards a recovery in consumer demand. “Time to buy a major household item” remains 24% below average despite a monthly bounce, while “time to buy a dwelling” is similarly 20% below average. We expect a lengthy period of weakness in Australia’s economy, with a return to trend activity growth not foreseen until late-2028.
Offshore, attention centred on FOMC messaging. Overall, the July minutes showed a high degree of caution over the inflation outlook, reflecting uncertainty around the Middle East conflict and US economic policy, as well as an expectation that the US economy would maintain its recent momentum. “Most participants anticipated that inflation would step down over the rest of the year as the effects of tariffs and earlier energy price increases wane, but many participants noted the possibility that inflation might be more persistently elevated.” In that context, “many participants assessed that policy tightening would likely be necessary if inflation did not decline”.
Since the meeting, data has been constructive for the disinflationary trend, and the majority of FOMC members who have spoken have recognised the importance of the Committee’s credibility on inflation but also that they have time on their side in assessing conditions.
Turning to Asia, the July China data round underwhelmed yet again. The return from trade is incredible, but retail sales growth has essentially stalled, 0.6%yr, and the decline in fixed asset investment is increasingly broad based, -6.7%ytd. House price declines continue to weigh on household wealth, and domestic equity holdings do not have the scale or breadth to compensate.
Authorities may be keeping quiet on stimulus ahead of the next meeting between President Xi and President Trump, and as the US looks to expand its economic actions against Iran – potentially via third parties with ties to Iran, such as China. But, very clearly, there is an urgent need for stimulus if the 2026 and 2027 growth targets are to be achieved.
