All new governments face challenges but the Albanese government faces some very unique economic problems no previous government has had to deal with as it comes to grips with running the country. Let me explain.

Migration and the labour force

Last week when the unemployment rate came out at 3.9%, I wondered if people knew just how weird things were in the labour force.

I tweeted the following graph to point out that the labour force is far removed from normality:

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There are now 139,100 fewer people aged 15-34 in the labour force than there were in March 2020, and compared to the trend since 2015 there are about 354,000 fewer people than would have been expected.

All of it is due to the closed borders during the pandemic, and the reduction in foreign students, who work part-time.

That is a significant gap in output and is why you are hearing so much talk about labour supply shortages.

It will change as migration is opened up, but will also likely lead to higher unemployment rates – purely because the unemployment rate is a mathematical equation of unemployed divided by the labour force.

But to increase output, apart from increasing productivity, you need more labour.

Tourism and hospitality

The impact of border closures hits most directly 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 prior to 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 prior to the pandemic we counted on increasing foreign student numbers – especially from China and 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?

This is horrible for the sector if our tertiary institutions continue to be funded in such a way that doesn’t just encourage more foreign 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 with it 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 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 fertiliser) – have risen astonishingly in the past 6-12 months:

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There is nothing the government or the Reserve Bank of Australia can really do to influence this.

But also within Australia our own habits are causing inflation to rise faster.

The pandemic stopped us going out and using services. In the meantime, given the stimulus measures that were introduced during the pandemic to keep the economic moving, we have 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 we are buying services like we are in a recession.

Combine this with world commodity price rises and 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 before has ever begun its term of office knowing with absolute certainty that interests rates will only go higher – because they are already at the bottom.

But not only do they have the lowest interest rate, they also face the sharpest increase in rates ever forecast:

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The market is forecasting 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 back in 2009 when the RBA increased the cash rate 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.

Currently the average mortgage in NSW is around $785,000, and so the same increase of 1.75% would see payments go up $860 a month.

That makes for a tricky proposition when increasing rates – small moves will have big impacts, and also increase the risk of the RBA lifting them too much.

Wages

If 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 backwards by nearly a decade.

It means even if this government was able to oversee real wages rising at the speed they did during the mining boom, we won’t get back to pre-pandemic levels until 2027. Conversely if the speed is more like that 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 both the government and the RBA, and strong communication to explain to the public what is happening.

Throw into the mix the usual concerns such as poverty, housing and rental affordability, and the government is in for a tough time, with little opportunity to pause and take a breath.