Unemployment remains at 4.1% — but participation is doing the work

Market UpdateUnemployment holds, but the headline hides the story

Employment growth was modest but steady. January employment rose 17.8k, broadly in line with expectations, with hours worked also increasing. After volatile swings late last year, the data suggests the labour market is stabilising rather than accelerating.

Demand is firmer, but not strong. The employment-to-population ratio has levelled out after declining for much of 2025. Care-sector growth has cooled, while market-sector hiring is gradually improving. Employment growth appears near its trough, with a gradual recovery expected into 2026.

Unemployment held at 4.1%, marking a shift from the steady rise seen through 2025. However, annual employment growth (around 1.1%) remains well below its long-run average, indicating conditions are not overheating.

Participation is the key swing factor. The recent fall in unemployment is largely due to weaker labour force participation rather than stronger hiring. Participation has fallen 0.6ppt over the year, influenced by easing cost-of-living pressures. A rebound in participation could see unemployment rise again in coming months.

Policy interpretation remains balanced. While the RBA may view stable unemployment as evidence of a tight labour market, benign wages growth and participation-driven dynamics suggest no clear re-tightening — keeping rate expectations finely balanced.

Consumer ConfidenceConfidence remains weak

WagesSteady but not surging

• Wages rose 0.8% in Q4 and 3.4% YoY per the latest Wage Price Index.
• Private and public sector outcomes were similar, though public sector wages slightly stronger annually.
• Outcomes continue to reflect enterprise agreements and scheduled pay increases rather than broad wage pressure.
• Health care, education and construction were the larger contributors.
• At 3.4% wages don’t signal a wage-price spiral, but they remain firm enough to keep the RBA attentive to services inflation.

Foreign ExchangeAUD at a crossroads — rates, resilience and rising volatility

• The AUD trading around US$0.70, near three-year highs, supported by RBA tightening expectations.
• Markets pricing ~70% probability of a near-term 25bp hike with around 50bp of tightening expected over the year.
• Divergence between a hawkish RBA and an easing US Fed has supported the AUD.
• Credit growth surprisingly strong: private sector credit +0.8% in December (fastest since mid-2022), annual growth 7.7%. Housing credit ~60% of the total.
• Investor credit +1.0% MoM, business credit +1.0% — resilient risk appetite despite higher rates.
• Core Q4 inflation +0.9% Q, 3.4% YoY — services inflation remains sticky.

Sources: Westpac Weekly (13 February), ABS, Trading Economics, ANZ-Roy Morgan, Macrobond. This summary is for informational purposes only and should not be considered financial advice.