Cliff Notes: labour market critical to the medium-term outlook
Key insights from the week that was.
In Australia, the week started on a slightly more positive note for consumers, with our Westpac-MI Consumer Sentiment Index showcasing a 2.8% bounce to 85.0 in August. The primary support was a significant improvement in households’ views and expectations around their finances, likely associated with the new financial year’s tax cuts. The sub-indexes tracking ‘family finances vs a year ago’ and ‘family finances next 12 months’ rose 11.7% and 5.1% respectively. These gains are coming off an incredibly weak base however, and given earlier surveys indicated a preference among consumers to rebuild savings buffers from their tax cut, it is understandable we are yet to see a signification improvement in card spending or intentions to ‘buy a major item’.
It is constructive to see that consumers also remain relatively untroubled over the outlook for jobs – a perspective that was certainly supported by July’s labour market data. Growth in employment was far stronger than expected, with nearly 60,000 jobs created in July after a solid run of gains over recent months. However, the main surprise was around labour supply, as evinced by the surge in labour force participation to a cycle high of 67.1%, the highest read in over a century. It was impressive to see businesses absorb such a large portion of this growth via employment; but in the end, the surge in labour supply was enough to see the unemployment rate lift to 4.2%, incrementally adding slack.
Conditions from an income perspective also remain constructive. The wage price index lifted 0.8% (4.1%yr) in Q2. Containing inflation risks, nominal wage growth has undergone a significant moderation on a six-month annualised basis, from 4.7%yr in December to 3.4%yr at June as the labour market moves into balance. Though, with annual inflation having slowed more than wage growth, consumers are slowly beginning to feel the cost of living pressures they have been experiencing let up. In time, this should support a further improvement in family finance expectations and spending.
As Westpac Chief Economist Luci Ellis and Senior Economist Pat Bustamante noted earlier this week, one of the more puzzling elements of the RBA’s revised forecasts is the assertion that aggregate supply is lower than previously thought. As above, this week’s labour force update instead highlighted continued strength in labour supply. In today’s essay, Chief Economist Luci Ellis elaborates on what the latest data implies for the RBA’s view on productivity and activity.
First stop offshore this week is New Zealand. There the RBNZ surprised the market by cutting the cash rate 25bps to 5.25%. As detailed by Westpac NZ Economics, the RBNZ also lowered the OCR track significantly, implying another cut will occur at the October Monetary Policy Review and a total of 75bp of cuts will be delivered by end-2024. The RBNZ’s updated profile also suggests the RBNZ still aims to reach neutral OCR levels circa 3% by 2027, but now more quickly. Warranting the revised view on interest rates, the RBNZ’s near-term forecasts for economic growth have been revised down significantly. A wider output gap and looser labour market provides confidence inflation will ultimately fall back to the 2%yr mid-point of the target range, though this is not currently expected until Q2 2026.
The US data flow meanwhile continued to point to a goldilocks economy: benign inflation paired with robust activity growth. Consumer prices gained 0.2% in July, seeing annual inflation edge lower to 2.9%yr and 3.2%yr respectively for headline and core inflation. Food away from home and services ex-shelter were both benign, signalling wage pressures are not a concern and that the discretionary demand pulse is modest. Core goods prices meanwhile exhibited broad-based and persistent weakness. While shelter surprised to the upside in July, with the labour market cooling and households financially constrained, this momentum is highly unlikely to persist; indeed, the BLS' real-time measures of rents point to flat or negative outcomes versus shelter's near-5% annualised pace in July. Earlier in the week, the PPI was also constructive for the inflation outlook, rising 2.2%yr in July, undershooting expectations.
Retail sales subsequently showed strength in July, gaining 1.0% thanks to a strong rebound in autos (sales ex autos were up +0.4%, and the narrower control group +0.3%). In the year-to-date, nominal gains have been modest overall, the control group averaging a monthly gain of 0.3%, but that is a result consistent with real consumption growth modestly below trend, not recession. Of the other US data out this week, the regional Fed manufacturing surveys were weak, but initial claims continued to point to an absence of firing across the economy.
Across the Atlantic, UK data justified the Bank of England continuing with their policy easing, albeit while remaining confident in economic growth’s upturn. The July CPI print surprised to the downside, prices falling 0.2%mth. Base effects saw annual headline inflation edge up from 2.0%yr to 2.2%yr, but annual core inflation slowed from 3.5% to 3.3%. Inflation’s breadth also continued to narrow, with only 54% of the basket now growing in excess of the BoE’s annual inflation target of 2.0%, down from 86% this time last year. Helpfully for the BoE’s risk assessment and messaging, annual services inflation came in well below expectations in July, decelerating from 5.7% to 5.2% (consensus 5.5%yr). Earlier in the week, wages ex. bonus also softened to 5.4%yr in June from 5.7% in May, giving the BoE more confidence to persist with their cutting cycle.
Like in the US, UK activity data remains constructive, GDP growth printing as expected in Q2, at 0.6% (0.9%yr). That said, the detail highlighted a greater degree of downside risks, with private consumption and business investment both weak. Consumption gained just 0.2%, half Q1's 0.4% gain and the Q2 consensus expectation of 0.5%. Investment meanwhile declined 0.1% instead of rising 0.4% as expected. Government spending offset, gaining 1.4% in Q2.
Turning finally to Asia. Japanese GDP surprised to the upside in Q2, the 0.8% gain offsetting Q1's 0.6% decline. Private consumption was the primary support for growth in the quarter, increasing 1.0%. Business investment was similarly robust, up 0.9%. Chinese partial data, in contrast, disappointed again in July. At 5.9%ytd and 3.5%ytd respectively, industrial production and retail sales growth showed no progress from June. And fixed asset investment weakened further, year-to-date growth decelerating to 3.6% from 3.9%, as property investment’s contraction accelerated, from –9.9%ytd to –10.2%ytd, and momentum in the strong sub-sectors of high-tech manufacturing and utilities moderated. Adding further pessimism to the view for housing and consumption, new and existing home prices fell another 0.7% and 0.8% in July. There is clearly need for additional policy support into year-end; to boost sentiment, authorities next steps have to take a more active approach and be immediate for consumers and the property sector.
Stay informed with Westpac IQ
Get the latest reports straight to your inbox.
Related articles
Browse topics
Disclaimer
©2025 Westpac Banking Corporation ABN 33 007 457 141 (including where acting under any of its Westpac, St George, Bank of Melbourne or BankSA brands, collectively, “Westpac”). References to the “Westpac Group” are to Westpac and its subsidiaries and includes the directors, employees and representatives of Westpac and its subsidiaries.
Things you should know
We respect your privacy: You can view our privacy statement at Westpac.com.au. Each time someone visits our site, data is captured so that we can accurately evaluate the quality of our content and make improvements for you. We may at times use technology to capture data about you to help us to better understand you and your needs, including potentially for the purposes of assessing your individual reading habits and interests to allow us to provide suggestions regarding other reading material which may be suitable for you.
This information, unless specifically indicated otherwise, is under copyright of the Westpac Group. None of the material, nor its contents, nor any copy of it, may be altered in any way, transmitted to, copied of distributed to any other party without the prior written permission of the Westpac Group.
Disclaimer
This information has been prepared by the Westpac and is intended for information purposes only. It is not intended to reflect any recommendation or financial advice and investment decisions should not be based on it. This information does not constitute an offer, a solicitation of an offer, or an inducement to subscribe for, purchase or sell any financial instrument or to enter into a legally binding contract. To the extent that this information contains any general advice, it has been prepared without taking into account your objectives, financial situation or needs and before acting on it you should consider the appropriateness of the advice. Certain types of transactions, including those involving futures, options and high yield securities give rise to substantial risk and are not suitable for all investors. We recommend that you seek your own independent legal or financial advice before proceeding with any investment decision. This information may contain material provided by third parties. While such material is published with the necessary permission none of Westpac or its related entities accepts any responsibility for the accuracy or completeness of any such material. Although we have made every effort to ensure this information is free from error, none of Westpac or its related entities warrants the accuracy, adequacy or completeness of this information, or otherwise endorses it in any way. Except where contrary to law, Westpac Group intend by this notice to exclude liability for this information. This information is subject to change without notice and none of Westpac or its related entities is under any obligation to update this information or correct any inaccuracy which may become apparent at a later date. This information may contain or incorporate by reference forward-looking statements. The words “believe”, “anticipate”, “expect”, “intend”, “plan”, “predict”, “continue”, “assume”, “positioned”, “may”, “will”, “should”, “shall”, “risk” and other similar expressions that are predictions of or indicate future events and future trends identify forward-looking statements. These forward-looking statements include all matters that are not historical facts. Past performance is not a reliable indicator of future performance, nor are forecasts of future performance. Whilst every effort has been taken to ensure that the assumptions on which any forecasts are based are reasonable, the forecasts may be affected by incorrect assumptions or by known or unknown risks and uncertainties. The ultimate outcomes may differ substantially from any forecasts.
Conflicts of Interest: In the normal course of offering banking products and services to its clients, the Westpac Group may act in several capacities (including issuer, market maker, underwriter, distributor, swap counterparty and calculation agent) simultaneously with respect to a financial instrument, giving rise to potential conflicts of interest which may impact the performance of a financial instrument. The Westpac Group may at any time transact or hold a position (including hedging and trading positions) for its own account or the account of a client in any financial instrument which may impact the performance of that financial instrument.
Author(s) disclaimer and declaration: The author(s) confirms that (a) no part of his/her compensation was, is, or will be, directly or indirectly, related to any views or (if applicable) recommendations expressed in this material; (b) this material accurately reflects his/her personal views about the financial products, companies or issuers (if applicable) and is based on sources reasonably believed to be reliable and accurate; (c) to the best of the author’s knowledge, they are not in receipt of inside information and this material does not contain inside information; and (d) no other part of the Westpac Group has made any attempt to influence this material.
Further important information regarding sustainability-related content: This material may contain statements relating to environmental, social and governance (ESG) topics. These are subject to known and unknown risks, and there are significant uncertainties, limitations, risks and assumptions in the metrics, modelling, data, scenarios, reporting and analysis on which the statements rely. In particular, these areas are rapidly evolving and maturing, and there are variations in approaches and common standards and practice, as well as uncertainty around future related policy and legislation. Some material may include information derived from publicly available sources that have not been independently verified. No representation or warranty is made as to the accuracy, completeness or reliability of the information. There is a risk that the analysis, estimates, judgements, assumptions, views, models, scenarios or projections used may turn out to be incorrect. These risks may cause actual outcomes to differ materially from those expressed or implied. The ESG-related statements in this material do not constitute advice, nor are they guarantees or predictions of future performance, and Westpac gives no representation, warranty or assurance (including as to the quality, accuracy or completeness of the statements). You should seek your own independent advice.
Additional country disclosures:
Australia: Westpac holds an Australian Financial Services Licence (No. 233714). You can access Westpac’s Financial Services Guide here or request a copy from your Westpac point of contact. To the extent that this information contains any general advice, it has been prepared without taking into account your objectives, financial situation or needs and before acting on it you should consider the appropriateness of the advice.
New Zealand: In New Zealand, Westpac Institutional Bank refers to the brand under which products and services are provided by either Westpac (NZ division) or Westpac New Zealand Limited (company number 1763882), the New Zealand incorporated subsidiary of Westpac ("WNZL"). Any product or service made available by WNZL does not represent an offer from Westpac or any of its subsidiaries (other than WNZL). Neither Westpac nor its other subsidiaries guarantee or otherwise support the performance of WNZL in respect of any such product. WNZL is not an authorised deposit-taking institution for the purposes of Australian prudential standards. The current disclosure statements for the New Zealand branch of Westpac and WNZL can be obtained at the internet address www.westpac.co.nz .
Singapore: This material has been prepared and issued for distribution in Singapore to institutional investors, accredited investors and expert investors (as defined in the applicable Singapore laws and regulations) only. Recipients of this material in Singapore should contact Westpac Singapore Branch in respect of any matters arising from, or in connection with, this material. Westpac Singapore Branch holds a wholesale banking licence and is subject to supervision by the Monetary Authority of Singapore.
U.S.: Westpac operates in the United States of America as a federally licensed branch, regulated by the Office of the Comptroller of the Currency. Westpac is also registered with the US Commodity Futures Trading Commission (“CFTC”) as a Swap Dealer, but is neither registered as, or affiliated with, a Futures Commission Merchant registered with the US CFTC. The services and products referenced above are not insured by the Federal Deposit Insurance Corporation (“FDIC”). Westpac Capital Markets, LLC (‘WCM’), a wholly-owned subsidiary of Westpac, is a broker-dealer registered under the U.S. Securities Exchange Act of 1934 (‘the Exchange Act’) and member of the Financial Industry Regulatory Authority (‘FINRA’). In accordance with APRA's Prudential Standard 222 'Association with Related Entities', Westpac does not stand behind WCM other than as provided for in certain legal agreements between Westpac and WCM andobligations of WCM do not represent liabilities of Westpac. This communication is provided for distribution to U.S. institutional investors in reliance on the exemption from registration provided by Rule 15a-6 under the Exchange Act and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors in the United States. WCM is the U.S. distributor of this communication and accepts responsibility for the contents of this communication. Transactions by U.S. customers of any securities referenced herein should be effected through WCM. All disclaimers set out with respect to Westpac apply equally to WCM. If you would like to speak to someone regarding any security mentioned herein, please contact WCM on +1 212 389 1269. Investing in any non-U.S. securities or related financial instruments mentioned in this communication may present certain risks. The securities of non-U.S. issuers may not be registered with, or be subject to the regulations of, the SEC in the United States. Information on such non-U.S. securities or related financial instruments may be limited. Non-U.S. companies may not be subject to audit and reporting standards and regulatory requirements comparable to those in effect in the United States. The value of any investment or income from any securities or related derivative instruments denominated in a currency other than U.S. dollars is subject to exchange rate fluctuations that may have a positive or adverse effect on the value of or income from such securities or related derivative instruments.
The author of this communication is employed by Westpac and is not registered or qualified as a research analyst, representative, or associated person of WCM or any other U.S. broker-dealer under the rules of FINRA, any other U.S. self-regulatory organisation, or the laws, rules or regulations of any State. Unless otherwise specifically stated, the views expressed herein are solely those of the author and may differ from the information, views or analysis expressed by Westpac and/or its affiliates.
UK and EU: The London branch of Westpac is authorised in the United Kingdom by the Prudential Regulation Authority (PRA) and is subject to regulation by the Financial Conduct Authority (FCA) and limited regulation by the PRA (Financial Services Register number: 124586). The London branch of Westpac is registered at Companies House as a branch established in the United Kingdom (Branch No. BR000106). Details about the extent of the regulation of Westpac’s London branch by the PRA are available from us on request.
Westpac Europe GmbH (“WEG”) is authorised in Germany by the Federal Financial Supervision Authority (‘BaFin’) and subject to its regulation. WEG’s supervisory authorities are BaFin and the German Federal Bank (‘Deutsche Bundesbank’). WEG is registered with the commercial register (‘Handelsregister’) of the local court of Frankfurt am Main under registration number HRB 118483. In accordance with APRA’s Prudential Standard 222 ‘Association with Related Entities’, Westpac does not stand behind WEG other than as provided for in certain legal agreements (a risk transfer, sub-participation and collateral agreement) between Westpac and WEG and obligations of WEG do not represent liabilities of Westpac.
This communication is not intended for distribution to, or use by any person or entity in any jurisdiction or country where such distribution or use would be contrary to local law or regulation. This communication is not being made to or distributed to, and must not be passed on to, the general public in the United Kingdom. Rather, this communication is being made only to and is directed at (a) those persons falling within the definition of Investment Professionals (set out in Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (the “Order”)); (b) those persons falling within the definition of high net worth companies, unincorporated associations etc. (set out in Article 49(2)of the Order; (c) other persons to whom it may lawfully be communicated in accordance with the Order or (d) any persons to whom it may otherwise lawfully be made (all such persons together being referred to as “relevant persons”). Any person who is not a relevant person should not act or rely on this communication or any of its contents. In the same way, the information contained in this communication is intended for “eligible counterparties” and “professional clients” as defined by the rules of the Financial Conduct Authority and is not intended for “retail clients”. Westpac expressly prohibits you from passing on the information in this communication to any third party.
This communication contains general commentary, research, and market colour. The communication does not constitute investment advice. The material may contain an ‘investment recommendation’ and/or ‘information recommending or suggesting an investment’, both as defined in Regulation (EU) No 596/2014 (including as applicable in the United Kingdom) (“MAR”). In accordance with the relevant provisions of MAR, reasonable care has been taken to ensure that the material has been objectively presented and that interests or conflicts of interest of the sender concerning the financial instruments to which that information relates have been disclosed.
Investment recommendations must be read alongside the specific disclosure which accompanies them and the general disclosure which can be found here. Such disclosure fulfils certain additional information requirements of MAR and associated delegated legislation and by accepting this communication you acknowledge that you are aware of the existence of such additional disclosure and its contents.
To the extent this communication comprises an investment recommendation it is classified as non-independent research. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and therefore constitutes a marketing communication. Further, this communication is not subject to any prohibition on dealing ahead of the dissemination of investment research.