Westpac IQ report: addressing labor market risks

In Australia, the recent labor force report for August confirms the ongoing softening of the labor market. The rate of employment growth over the past three months has slowed to 1.8% annually, down from 2.5% in February. While the care sector has experienced a decline in growth, the market sector is showing signs of recovery. Despite a drop in participation rates leading to a stagnant unemployment rate of 4.2% last month, there may be an increase in the unemployment rate in the coming months. Surprisingly, the decline in underemployment is not reflecting an increase in labor utilization by employers but rather is linked to a reduction in part-time employment. The August labor market report is unlikely to influence the Reserve Bank of Australia’s decision-making, as they have already acknowledged the easing of labor market conditions in their recent communications. It is anticipated that the RBA may introduce rate cuts in November and two additional cuts in the first half of 2026 to address these challenges and stimulate the economy.

In the Australian manufacturing sector, conditions have worsened as the Q3 Westpac-ACCI Survey showed a decline in the Actual Composite index from 51.5 in Q2 to 48.8 in Q3, indicating a contraction. Although there has been a drop in orders and weak output, manufacturers remain optimistic about the future, with the Expected Composite currently scoring an elevated 58.1. The disparity between current conditions and future expectations may pose risks, especially if the economic recovery remains slow and uneven.

Moving on to New Zealand, the GDP for Q2 fell by 0.9%, surprising analysts and indicating a 0.6% decline over the year. In response to this downturn, the Reserve Bank of New Zealand is expected to implement further rate cuts to counter the trend and support the economy. Predictions suggest a 50bps cut at the October meeting and an additional 25bps reduction in November. The current expansionary policy rate should lead to a momentum pickup in 2026, with a likelihood of rebalancing monetary policy later in the year depending on economic conditions in the next 6-12 months.

The focus then shifted to major central banks globally. The Federal Open Market Committee (FOMC) lowered the fed funds rate by 25bps to 4.125% at its September meeting. The Committee emphasized risk management in its statement and press conference, highlighting ongoing uncertainty in the economic outlook. The updated forecasts indicate an optimistic outlook for GDP growth and inflation, suggesting that monetary policy remains effective in managing demand and inflation risks. The FOMC’s inflation forecast predicts a gradual decline from around 3.0% to 2.1% by the end of 2027, allowing for further rate cuts to stabilize the economy, with an expected rate of 3.1% by the end of 2027. However, conflicting risks may arise from weaker economic growth and labor market conditions and persistent inflation, necessitating a modestly restrictive stance in the absence of a recession.

Similarly, the Bank of Canada and the Bank of England have made rate adjustments to tackle economic challenges. The Bank of Canada has reduced rates by 25bps to 2.50%, attributing this decision to ongoing trade impacts on activity and subdued inflation pressures. Meanwhile, the Bank of England maintained its bank rate at 4.0% in a 7-2 split decision, emphasizing concerns about emerging inflation risks. The Monetary Policy Committee (MPC) plans to take a gradual approach towards easing in response to inflation concerns, though the timing may be adjusted based on disinflation progress and decreasing activity risks. The MPC has also decided to slow the pace of quantitative tightening to GBP70bn annually to stabilize Gilt markets and ensure economic stability. This strategic decision reflects a cautious and deliberate approach to monetary policy adjustments in response to changing economic conditions.