March Labour Force Preview
The March Labour Force Survey (LFS), due to be released on April 16th, was in the field from March 1st to 14th. This will garner significant interest given it is the first official economic data release that overlaps the Middle East conflict.
Impact from Middle East unlikely to appear in labour market data, yet
The March Labour Force Survey (LFS), due to be released next week, was in the field from March 1st to 14th. This will be the first official piece of ‘hard’ economic data since the onset of the Middle East conflict on February 28th and as such could garner significant interest, especially in the event of a downside surprise. That said, it is almost certainly too early for flow-on effects from this shock or from recent interest rate rises to be showing through in labour markets.
The surge in global oil prices is undoubtedly having an impact. Local fuel prices rose almost immediately. Our own Westpac-DataX Card Tracker data has already detected a clear shift in spending patterns since the onset of the conflict: fuel spending up 8.2% over the four weeks to March 21, reflecting a lift in both volumes and prices. Changes in non-fuel spending is still evolving – discretionary services spending has softened, largely in accommodation and recreation, but there is no real signs of weakness in discretionary goods spending.
However, the March LFS will only capture the first two weeks of the conflict. This is far too early to detect any meaningful shift in broad labour market conditions in Australia that could be tied to the Middle East conflict. This is because the labour market sits further downstream from price shocks, which take time to work through household spending to margins and decisions around investment and staffing. The costs associated re-hiring and re-training staff is why the labour market is often labelled as a ‘lagging indicator’ of the economy – any flow-through from higher fuel prices or global uncertainty is more likely to show up later in the year than in March’s data.
We do expect the labour market to soften later this year
Last week, we published our revised forecasts which take into account our updated baseline assumptions on the Middle East conflict and our revised view of the RBA policy outlook. In summary, the conflict is now expected to be materially bigger and more persistent than initially assumed, requiring the RBA to deliver another two 25bp rate hikes after the expected move in May, driving a more pronounced weakening in labour market conditions over the second half of this year.
Unlike the modest improvement that was anticipated before the conflict, employment growth is now expected to slow to a well below-average pace of 1.3%yr (on a three-month average basis) by end-2026. This will be slower than the rate of working age population growth, meaning the employment-to-population ratio is expected to decline from around 64% currently to 63.7% by year-end. A combination of softer labour demand and slightly higher labour force participation means that more slack will open up in the labour market this year, with the unemployment rate expected to rise from 4.3% currently to a peak of 5% by early-2027.
Experiences will differ across industries
While the labour market is expected to soften in aggregate, how this unfolds over the coming quarters will likely be uneven across the economy. Industries with a greater exposure to the fuel shock are likely see a clearer softening in labour demand initially. The starting point for labour demand will also be an important consideration.
Manufacturing is one such example – not only has the number of jobs declined for four consecutive quarters in the industry (–3.2%yr), but it is also the most fuel intensive industry in Australia (outside of utilities), where 41 cents is spent on fuel per dollar of gross value added. Our Westpac-ACCI Business Survey pointed to some green shoots for manufacturing prior to the Middle East conflict, but the onset of the fuel price shock could see declines in headcount persist for longer than otherwise.
Construction is another industry with significant exposure to fuel prices. We are already seeing reports of sharp cost increases across a range of building materials, which could put some dwelling projects at risk this year. Transport and logistics is another area worth monitoring – with increases in ‘fuel levies’ across a range of services, reduced usage could result in weaker labour demand in this sector. The sharp increase in flight costs also puts jobs in travel and tourism at risk.
Starting from April 2026, industry-level labour market data will only be available on a quarterly basis via the Australian Labour Account, with mid-quarter month estimates from the LFS being suspended as part of the transition in the ABS labour market statistics.
Watch out for differences in hours worked vs. employment
When employers want to reduce their labour demand, they can do so via two levers: decreasing the average number of hours worked, and/or decreasing headcount. During the recessions of the 1980s and 1990s, employers opted to reduce labour demand via both channels. But since the 2000s, periods of weakening labour demand has seen a larger response via a decrease in average hours worked, while headcount often initially slowed, before expanding again later on.
Earlier research from the RBA suggests the preference for average hours as the main lever of the adjustment can be attributed to the shorter and shallower nature of the downturns since the 2000s, as employers opt for greater flexibility by reducing labour demand while also retaining staff. Therefore, absent a severe recession, it can be assumed that the main response we are likely to see from the current shock is a pull-back in average hours worked. Growth in headcount will slow, but it is unlikely to decline on a sustained basis unless the shock proves to be more severe than currently assumed.
Inflation concerns take precedence for RBA
While February’s gain in employment was firmer than expected, it was partly a result of an ongoing shift in seasonal patterns in the data. The ABS noted that February “saw fewer people who were unemployed and waiting to start a job in January move into employment in February”. Since the pandemic, January months have tended to see more people than usual saying they have a job lined up for after the holidays but are not yet working – with many in this group labelled as ‘unemployed’. Come February, they move into the job and are now classified as ‘employed’. Given this dynamic has persisted for a few years, it could (and perhaps should) be seen as a shift in seasonal behaviours; but for now, seasonal factors are not yet fully adjusting for this, resulting in softer January reads and stronger February reads for employment growth.
Having now moved past this January/February seasonal dynamic, we have pencilled in a lift in employment of +25k for March – slightly firmer than the average gain over the preceding twelve months, reflecting the pre-conflict trend of firming employment growth. With the participation rate expected to tick down slightly to 66.8%, the unemployment rate is expected to print 4.2%.
For the RBA, though, the immediate focus is on the local inflation outlook and risks around inflation expectations. So, absent a significant surprise, March’s labour market data is not going to play a big role in the RBA’s next policy decision.
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