All new governments face challenges, but the Albanese government faces some unique economic problems no previous government has had to deal with when it comes to running the country. Let me explain.
Migration and the labor force
Last week when the unemployment rate came out at 3.9%, I wondered if people knew just how weird things were in the labor force.
I tweeted the following graph to point out that the labor force is far removed from normality:
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There are now 139,100 fewer people aged 15-34 in the labor force than in March 2020, and compared to the trend since 2015, there are about 354,000 fewer people than expected.
All of it is due to the closed borders during the pandemic and the reduction in international students who work part-time.
That is a significant output gap and is why you hear so much talk about labor supply shortages.
It will change as migration is opened up. Still, will also likely lead to higher unemployment rates – purely because the unemployment rate is a mathematical equation of unemployment divided by the labor force.
But to increase output, apart from increasing productivity, you need more labor.
Tourism and hospitality
The impact of border closures hits the tourism industry.
The latest short-term visitor arrivals show how weird things remain:
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Yes, the borders are opening – but will the numbers return? Given inflation rises (see below) and ongoing Covid concerns, how long will it take for international travel to return?
This is why there are still 35% fewer people working in air transport jobs than there were before the pandemic and why both accommodation and food and beverage jobs are among those that have yet to recover to pre-pandemic levels:
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Higher education
Another area hit by the lack of migration is the higher education sector.
For the decade before he the pandemic, w,e counted on increasing foreign student numbers – especially from China, India, and other Asian nations. Then the borders closed, and the numbers fell.
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They are slowly recovering, but will the numbers of Chinese students return to previous levels, given the international ructions between China and Australia?
It isn’t very pleasant for the sector if our tertiary institutions continue to be funded in such a way that doesn’t just encourage more international students but requires them. It is one of those examples of how when things are going “normally,” underlying problems are hidden.
Tertiary funding, our tourism industry, and the supply of young workers in part-time and casual jobs have been smashed by the pandemic and the border closures. Throw in the fact that lifting migration numbers also brings the increased danger of wage theft and mistreatment of workers, and the new government has a lot of mess to deal with.
Cost of living and inflation
The number one issue of the election by the length of the straight was the cost of living.
The problem here for the government is two-fold.
Firstly, much of the inflation is coming from overseas.
The prices of many commodities – whether they be for goods that we consume directly or which are inputs for other products (such as urea for fertilizer) – have risen astonishingly in the past 6-12 months:
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Nothing the government or the Reserve Bank of Australia can do to influence this.
But also, within Australia, our habits are causing inflation to rise faster.
The pandemic stopped us from going out and using services. In the meantime, given the stimulus measures introduced during the pandemic to keep the economic moving economy, bought masses of goods.
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In effect, we are buying goods like we are in the mother of all economic boom times and buying services like we are in a recession.
Combining this with world commodity price rises, in the past year, the price of goods rose on average 6.6% while the cost of services rose a more standard 3%.
Interest rates
No government has ever begun its term of office knowing with absolute certainty that interest rates will only go higher – because they are already at the bottom.
But not only do they have the lowest interest rate, but they also face the sharpest increase in rates ever forecast:
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The market forecasts a three percentage point cash rate increase in the next 12 months.
I think that would cause a recession, but even still, rates are going up.
But in 2009, when the RBA increased the cash rate by 1.75%pts in 14 months, the average New South Wales mortgage for an established house was $355,000. That rise increased monthly repayments by around $411.
The average mortgage in NSW is around $785,000, so the same increase of 1.75% would see payments go up $860 monthly.
That makes for a tricky proposition when increasing rates – small moves will have big impacts and increase the risk of the RBA lifting them too much.
Wages
If the cost of living was the big economic issue of the campaign, wages were not far behind. This government faces a massive problem because the recent hit to real wages is such that we have gone backward by nearly a decade.
It means even if this government could oversee real wages rising at the speed they did during the mining boom, we wouldn’t return to pre-pandemic levels until 2027. Conversely, if the speed is more lratratehat since 2013, we won’t get back there until next decade:
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All up, this makes for a very tough time ahead.
It will require high-level economic management from the government and the RBA and strong communication to explain what is happening to the public.
Throw the usual concerns, such as poverty, housing, and rental affordability, into the mix. The government is in for a tough time, with little opportunity to pause and breathe.
