The decline in Australia's unemployment rate in May was in line with expectations, but the latest data also points to "a genuine weakening" taking hold in the labor market, Westpac said in a Thursday report.
Australian Bureau of Statistics data showed the country's seasonally adjusted unemployment rate falling to 4.4% in May from 4.5% in the previous month, with the number of employed Australians growing by 40,300.
However, employment growth has cooled from a nascent recovery earlier this year, stalling flat over April and May from an average gain of around 25,000 per month over the course of the first quarter, the bank said.
It added that the unemployment rate temporarily dipped around the turn of the year but is once again trending higher on a three-month average basis.
"One of the key parts of our labor market view is that employment growth would soften at a faster clip than labor force growth, causing a rise in the unemployment rate amid stable participation," Westpac said. "That is the state of play at the moment."
The bank believes the shock from the Middle East conflict will take more time to fully manifest in the labor market, and expects most of the softening to materialize in the second half of the year. It also foresees the unemployment rate rising to a quarter-average of 5% in early 2027, driven by slower hiring as opposed to active labor shedding.