Source Credit : Portfolio Prints
Australia’s labour market rebounded in May, with employment rising strongly and the unemployment rate edging lower, underscoring the economy’s resilience despite elevated interest rates and persistent inflationary pressures. The stronger-than-expected jobs data reinforces the possibility that the Reserve Bank of Australia (RBA) could tighten monetary policy further if inflation remains above target.
Separate figures released on Thursday showed household spending recovered in May as travel activity normalized following a temporary slowdown in April linked to disruptions caused by the U.S.-Israeli conflict with Iran. The rebound suggests consumer demand remains relatively robust despite higher borrowing costs and elevated fuel prices.
According to the Australian Bureau of Statistics, net employment increased by 40,300 jobs in May, exceeding market expectations of a 30,000 gain. The result followed a revised decline of 40,600 jobs in April, effectively offsetting the previous month’s weakness.
The unemployment rate declined to 4.4% from 4.5%, matching economists’ forecasts and moving away from its highest level since September 2025. Meanwhile, the labour force participation rate rose slightly to 66.7%, indicating continued engagement in the workforce.
“The labour market’s rebound, following yesterday’s mixed inflation report, gives the RBA room to maintain an extended pause,” said Krishna Bhimavarapu, APAC economist at State Street Investment Management. However, he cautioned that persistently elevated inflation remains the key risk, leaving open the possibility of another interest rate increase later this year.
While the headline employment figures were encouraging, underlying details pointed to some softening in labour market conditions. Much of the employment growth came from part-time positions, while hours worked fell 1.1% in May. Additionally, job vacancies declined by 2.1% over the three months to May, marking the first decrease since late last year.
Overall, the mixed labour market data had little impact on near-term monetary policy expectations. Financial markets continue to assign only a modest probability of an interest rate increase in August, while a small amount of additional tightening remains priced in for November following the release of third-quarter inflation data.
At the same time, easing energy prices have shifted some market expectations toward potential rate cuts in the second half of next year. With oil prices returning to pre-conflict levels, the Australian dollar weakened 0.2% to US$0.6891, while three-year government bond yields fell four basis points to 4.371%, their lowest level since March.
The RBA has raised interest rates three times this year, taking the cash rate to 4.35% and fully reversing the policy easing implemented in 2025. Inflationary pressures remain elevated, with underlying inflation accelerating to 3.6% in May, significantly above the central bank’s target range of 2% to 3%.
The labour market also continues to be viewed as relatively tight. The RBA had projected that the unemployment rate would gradually rise to 4.7% by mid-2028, suggesting current conditions remain stronger than policymakers had anticipated.
“Today’s data indicates that economic conditions remain inflationary,” said Diana Mousina, Deputy Chief Economist at AMP. She noted that strong employment outcomes continue to support household incomes and consumer spending, helping offset the impact of higher energy costs and broader cost-of-living pressures.
