Australian economic view – August 2025

Market review

The Reserve Bank of Australia (RBA) chose to keep the cash rate steady at 3.85%, surprising the market. Three-month bank bills were up 8 basis points (bps), to 3.68% by month end. Six-month bank bill yields ended flat at 3.78%. Australia’s three-year government bond yields ended the month 16bps higher, at 3.42%, while 10-year government bond yields were 10bps higher at 4.26%.

Fracturing of the global economic and geopolitical norms continued apace through July, but the consequences of these shifts take months, if not years, to flow through. Economic data is yet to reflect much of the change and markets are impatient for evidence. Tariff news was sought, but not broadly clear in the lead up to the US’s August 1 deadline. Key deals were suggestive of a higher average rate. The US passed the One Big Beautiful Bill, and the GENIUS Act, both of which have long term implications for Treasury markets. The Federal Reserve (Fed) continues to hold out for more evidence of a slowing economy before easing, while Fed Chair Powell faces the opprobrium of the President.

The RBA surprised markets by pausing at their July meeting, the new Board wanting more evidence of easing inflation before lowering the cash rate. Second quarter CPI provided that confidence, with the headline coming in at 2.1%yoy, and the more stable trimmed mean series moderating to 2.7%yoy. The labour market was also soft, with the unemployment rate rising to 4.3%. Other indicators have been mixed, with some evidence of stabilisation in the household sector.

Market outlook

Markets reduced the amount of RBA easing expected, modestly, to a total of 81bps by the RBA, post the July meeting surprise. This remains close to our base case for the RBA to ease a further 100bps to 2.85%. Our low case reflects a weaker economic outcome and the RBA easing by a total of 250bps. We allocate a modest weight to the low case. Duration remains neutral, as we see better market opportunities elsewhere. We remain vigilant through the volatility to take advantage of mispricing.

Monthly focus – Employment maths

Australia’s labour market has been remarkably solid, surprising in its stability over the past year. However, the last two releases have been on the soft side, with the unemployment rate rising to its highest level since late 2021, at 4.3%. We anticipate further increases in the unemployment rate, as the softer private sector takes over the hiring mantel from the public sector.

The public sector, proxied through employment in the non-market sectors (education and training, healthcare and social assistance, and public administration and safety), has been the main driver of employment over the past year. The heathcare sector has been particularly strong since the advent of the pandemic. In total, the non-market sector’s share of employment has risen to 32%, from 28% pre-pandemic.

This rising share coincided with a large increase in both State and Federal Government deficits, and corresponding rising debt levels. Post the respective budget updates, we can surmise that extensive additional hiring in the non-market sector is set to fade. There are some areas in which there may also be moderations in non-market sector employment.

The private sector now needs to take up the hiring baton, a position it has been unwilling to take over the past six months. Private employment growth has been a moribund 0.9%yoy, well below that of total employment growth. Forward indicators of private sector employment, such as the ANZ job ads and the NAB business survey are suggestive of still soft private hiring conditions ahead. We can expect employment growth to lose momentum due to the slowing in non-market sector employment, exposing the labour market to the underlying softness in the private sector.

Balancing this outcome, in what may be considered a double-edged sword, is the moderation in overall labour market growth. Strong migration levels had seen a significant lift in the number of people newly entering the labour market, i.e. increasing labour supply, post pandemic. This impact increases labour demand, as well as supply. That flow has been stemmed, and supply reduces.

The historical average increase in the labour market per month has been around 20.5k, post pandemic, that increased to 35k. As migration flows continue to normalise, we can expect the monthly new labour supply to also normalise. As a result, the per month change in employment number needed to keep the unemployment rate stable is lower than it has been since 2022.

So, while non-market sector employment fades and private employment remains soft, we can expect the unemployment rate to rise, but not to levels that would indicate a more troubling underlying economic environment. The RBA are also looking for a peak in the unemployment rate to 4.3%. We see it a little higher and enough to warrant the RBA returning the cash rate to levels more akin to neutral over time.

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