War fuels fears of stagflation
Annual CPI eased slightly from 3.8% in January to 3.7% in February, remaining well above the RBA’s 2-3% target band. Housing continued to be the dominant source of inflationary pressure, rising 7.2% over the year, alongside firm increases in food & non‑alcoholic beverages and recreation & culture.
Treasury modelling indicates the Middle East conflict could either trigger a temporary oil‑price spike or a more persistent rise, risking inflation remaining elevated for longer than currently expected and complicating the outlook for monetary policy.
Policy impact on household spending
Both non‑discretionary and discretionary spending strengthened in the middle of 2025.
This was in response to monetary easing, with the uplift aligning with the RBA’s 25‑basis‑point rate cuts in February, May and August 2025.
Monetary policy decisions will play a significant role in shaping household spending patterns, particularly with rate rises in early 2026.
This will in turn influence the performance of consumer‑focused industries including retail and hospitality.
Unemployment rate remained steady
The unemployment rate remained at 4.3% in March, while the participation rate fell to 66.8%.
Employment growth in March was driven by an increase in full-time work, which was partly offset by a decline in part-time employment.
The labour market has now operated at, or above full employment for four consecutive years.
The resilience seen in employment in March partly explains the Reserve Bank’s decision to lift interest rates; but mounting labour market pressures are expected in coming months as the Middle East conflict persists.
Divergent employment trends across occupations
Signs of labour market softening are evident at the occupational level, where employment losses have been concentrated among lower‑skilled roles.
Employment fell by around 4-5% during 2025 across three major occupational groups: clerical & administrative workers, machinery operators & drivers, and sales workers.
This points to the emergence of a two‑speed labour market, in which robust job growth in higher‑skilled and care‑focused areas is occurring alongside continued job losses in lower‑skilled occupations.
Industrial construction remained subdued
Engineering construction declined by 1.8% in the final quarter of 2025 as momentum in private‑sector activity slowed.
Private engineering work edging up only 0.3% after a mid‑2025 surge that quickly unwound.
At the same time, public‑sector engineering activity contracted, falling by 4.2% to $16.9b.
Even with recent softening, the high level of government infrastructure activity over recent years created competition for workers and materials, contributing to elevated project costs and limiting the private sector’s ability to scale industrial builds.
Investment growth driven by datacentres
Non‑mining investment strengthened in the second half of 2025, reaching 4.7% annual growth - its fastest pace since the post‑pandemic period.
This was largely driven by a surge in datacentre construction within the information, media and telecommunications sector, where private capital spending rose to $16.0 billion in 2025, up 36% from 2024.
This single industry accounted for 64% of the $6.6 billion increase in non‑mining private investment, indicating that while datacentre activity provided a significant boost, the broader recovery in non‑mining investment remains limited.
