Westpac warns Australia’s unemployment rate masks soft demand and falling participation

Abstract:

Westpac says January’s jobs information present a secure unemployment charge at 4.1%, however participation declines are doing many of the work. Underlying hiring stays subdued, and a rebound in participation might raise unemployment again towards 4.5% in coming months.

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Westpac says Australia’s January labour force report paints a steadier image than the volatility of late 2025 suggests, however cautions that the obvious firmness within the unemployment charge is being pushed extra by falling participation than by renewed hiring momentum.

Employment rose by 17,800 in January, broadly in step with market expectations for a 20,000 acquire however beneath Westpac’s forecast of 40,000. The result follows uneven readings in latest months, together with a 30,300 decline in November and a 68,500 rebound in December. Common hours labored elevated 0.6% over the month, partly reflecting fewer folks taking go away than is typical for January.

The unemployment charge held at 4.1%, marking a break from the gradual uptrend seen via most of 2025, when joblessness rose from a quarterly common of 4.0% in late 2024 to 4.3% by September 2025. By December it had eased to 4.2%, and January’s print suggests it’s monitoring nearer to a 4.1% common.

Nonetheless, Westpac argues the steadiness in unemployment masks mushy underlying demand. On a three-month common foundation, annual employment development stays at 1.1%, properly beneath the long-run common of 1.9%.

The important thing driver of the decrease unemployment charge has been a decline in labour pressure participation, which has fallen 0.6 proportion factors over the previous yr. Progress within the labour pressure has been weaker than employment, successfully compressing the unemployment charge. Westpac estimates that had participation held regular over the previous six months, the unemployment charge could be nearer to 4.5%.

The financial institution attributes a lot of the participation weak point to cyclical forces, together with easing cost-of-living pressures lowering the urgency for marginal employees to hunt employment. Whereas this dynamic might reverse if inflation and rates of interest rise, Westpac’s base case is for participation to raise over the yr forward — which might, in flip, push unemployment larger.

For the Reserve Financial institution of Australia, the information complicates the outlook. Whereas policymakers stay alert to inflation persistence and proceed to characterise the labour market as tight, Westpac is hesitant to explain latest developments as a “re-tightening,” significantly given benign wages data. A participation-driven drop in unemployment, it argues, carries a really totally different inflation sign than one pushed by accelerating hiring.