Malcolm Turnbull was sworn in today as Australia’s Prime Minister having won Monday’s Liberal Party leadership ballot, ousting Tony Abbott, to become Australia’s sixth Prime Minister in 8 years. Interestingly, it was Abbott who ousted Turnbull from the opposition leadership position in 2009, by just one vote, when the Liberals were in opposition.
A glance at the history suggests Australian politics have a history of being cut-throat; more recently Julia Gillard ousted of Kevin Rudd in 2010, only to then be ousted herself and replaced by Kevin Rudd again in 2013. Further back, Robert Hawke was deposed as leader in 1991 by Paul Keating and John Gorton, after a tie in a confidence vote on his leadership exercised his casting vote against himself, in 1971.
But the writing had been on the wall in that Tony Abbott had faced, but survived, a no confidence vote in February this year. Abbott’s pledge to improve the Liberal-National coalition’s ratings had fallen short with a 7 September poll in ‘The Australian’ showing the government trailing the opposition with 46 percent of the vote against 54 percent. Moreover, the public favoured Bill Shorten, the opposition leader, as Prime Minister over Tony Abbott.
However, Turnbull faces the challenge of not only uniting the Liberal Party but also in trying to implement policy to improving Australia’s weakening growth prospects. Over the past decade, Australia has benefited from a China’s voracious commodity demand driving a resources and investment boom. But now with China’s growth on a slower trajectory, with more emphasis on services and consumption led growth, commodity prices have declined sharply hurting growth. The Australian economic growth rate slowed to just 0.2 percent qoq or 2 percent yoy in Q2 2015. The economy now faces an altogether tougher operating environment and Turnbull has been clear that the government needs to provide better economic leadership; Joe Hockey is likely to be replaced as Treasurer with Scott Morrison touted as his replacement.
As we noted before, the May budget forecast an acceleration in GDP growth from 2.5% in 14/15 to 2.75% in 15/16, then to 3.25% for 2016/2017 and subsequently accelerating to 3.5% and staying at that run-rate for 4 years looks overly optimistic. Government spending is constrained in an attempt to try and balance the books, a predicament made worse as declining commodity prices reduce revenues. Added to this, some of the budget “saving” assumptions are unlikely to get passed by the senate; the ruling Liberal/National Party Coalition controls the House of Representatives but is short of a Senate majority.
The IMF noted in its June 2015 Article IV concluding Statement that while Australia has grown nearly twice as fast as its peer group over the past two decades but in the past two years output growth has been below trend, unemployment has risen to six percent and real incomes have declined. It goes on to state “over the medium term and without reform, growth is likely to converge to a slower potential rate, reflecting less capital accumulation and only modest productivity growth. This lower potential would still mean income growth in line with other advanced countries, but significantly slower than Australians have been used to over the last two decades. Slower growth would also make fiscal consolidation more difficult. The risks around this outlook seem somewhat skewed to the downside.”
On our 2011 estimates Australia had net foreign liabilities to GDP of 81.5% of GDP, which is outside our 50% debt/GDP cut-off, the threshold that IMF research indicates is associated with increasing risk of external crises. Clearly, elevated household debt levels and a budget deficit are issues that Australia needs to address in the medium term. But as Fitch noted in a statement the leadership change itself will not have an immediate credit impact on Australia’s AAA rating.