Australian Economy Weekly Update — Week Ending 23 January 2026
The ABS December 2025 Labour Force release confirms that the Australian labour market tightened sharply at the end of 2025, intensifying concerns that the economy is operating beyond its sustainable capacity. Employment surged by more than 65,000 in December, above expectations, with an unusually large increase in full-time roles, pushing the unemployment rate down to 4.1 per cent. While part of the decline reflected a fall in unemployment among younger Australians, likely influenced by seasonal holiday hiring, the scale of full-time job creation suggests underlying labour demand remains strong. Underutilisation also declined further, reinforcing the view that spare capacity in the labour market is extremely limited by historical standards.
From a broader macroeconomic perspective, the persistence of such tight labour market conditions points to ongoing wage and service inflationary pressures, particularly in an environment of weak productivity growth. Economists have increasingly characterised the economy as having reached its “speed limit”, where inflationary pressures are driven less by strong output growth and more by capacity constraints, elevated public-sector spending, and subdued productivity. This dynamic complicates the disinflation process and raises the risk that inflation remains stubbornly above target even as headline growth moderates.
For monetary policy, the December data materially shift the balance of risks for the Reserve Bank of Australia. Having previously described labour market conditions as “a little tight”, the RBA now faces evidence that employment and inflation are both overshooting its November forecasts, which had assumed a gradual rise in unemployment towards 4.5 per cent.
Financial markets responded by materially increasing the probability of a rate hike at the February meeting, reflecting concern that current policy settings may no longer be sufficiently restrictive. While economists caution that large monthly employment gains often partially reverse and that the RBA will focus on sustained trends rather than a single data point, the strength of full-time job growth lowers the bar for policy tightening. At a minimum, the data significantly reduces the scope for near-term easing and strengthens the case for holding rates restrictive for longer, with the February Statement on Monetary Policy likely to be pivotal in reassessing the outlook for inflation, labour market slack, and capacity pressures.
Source: Australian Bureau of Statistics, Labour Force, Australia, January 2026