Inflationary pressures return
Inflation has been rising since mid-2025, with the CPI jumping to 3.8% in December – worryingly, well above the 2-3% target band and still rising.
While some of the rise is due to the roll-off of household energy subsidies, price increases are broad-based and seen for almost all products.
The RBA forecasts CPI to peak at 4.2% in June 2026, before easing over the following year.
The return of high inflation will drive up business costs and wages again in 2026 and force the RBA to tighten monetary policy.
Labour market tightened
The unemployment rate fell from 4.3% to 4.1% in December as 65,000 people joined the workforce. The underemployment rate also declined slightly, falling 0.5 points to 5.7%.
The easing cycle since 2023 may now have ended, with the labour market tightening over the last three months of 2025.
The labour market has now been at or over full employment for four years – the longest stretch in Australian recorded statistics.
Very high levels of public sector job creation since the pandemic is responsible in a context of subdued private sector economic conditions.
Vacancies fall as private sector slows
Over 2025 job vacancies fell by 17,800, a decline of 5.2% on a year earlier.
The private sector drove this drop, with vacancies down 6.8% over the year. Public sector vacancies rose 8.9% as government hiring continued strongly during the year.
The bulk of the fall occurred in NSW and VIC, where weaker economic conditions have constrained private sector output. Falling vacancies will ease business hiring pressures but is a marker of broader private sector weakness in the two largest states.
Casual jobs continued to decline
In August 2025, Australia had 12.3 million employees, with casuals making up 19% — about one in five workers.
The share of casual employees has fallen by around 4% over the past decade.
Over half of all casual workers (53%) were employed in accommodation & food, retail and healthcare sectors.
Nearly three‑quarters of casual employees (73%) preferred casual work for its flexibility and higher pay.
Industrial builds remained slow
Engineering construction fell by 6.6% in the third quarter of 2025 as private sector activity slowed.
Private engineering work registered a 14.2% quarterly fall, as a lift during the middle of 2025 proved short-lived. There has been no growth in private engineering work for two years.
Public sector work continues to rise and has grown by 9% over the last two years.
Greater competition from public infrastructure works has imposed cost and workforce pressures on private sector industrial builds.
Government’s outsized contribution to growth
Government spending drove about 90% of Australia’s GDP growth in 2023-24, but this pattern has begun to rebalance in 2025 as private sector activity slowly recovers.
However, the handover remains incomplete. Government contributions are still above historical norms, while private sector investment is still relatively narrow.
This poses a challenging question for the federal budget – to balance the need for budget repair (and lower growth in spending) against the economy’s dependence on that spending.
