Australia Recession Risk Flagged in Rudd Rhetoric Shift: Economy

Kevin Rudd is ditching the optimism of his predecessor and selling himself as the best leader to steer Australia through a downturn as Chinese demand wanes.

The new prime minister, who ousted Julia Gillard last week as the ruling Labor party headed toward a landslide election loss, is channeling his ex-boss Ross Garnaut in flagging that the end of a China-led mining boom could lead to a recession. He’s highlighted the dangers posed by a slowing China in at least five statements and warned policies advocated by his opponent Tony Abbott would result in British-style contraction.

As employers including Ford Motor Co. cut jobs, and the central bank said today growth is likely to remain below trend in the near term as it held interest rates steady, Rudd’s language puts him more in tune with voters than the message of prosperity emphasized by Gillard and former Treasurer Wayne Swan. Rudd, 55, is betting his record as leader through the 2007-2009 financial crisis, when Australia sustained growth, will help close Labor’s two-year opinion-poll deficit.

“Rudd’s wanting to re-frame the economic debate,” said Stephen Koukoulas, a former adviser to Gillard and now managing director of Canberra-based Market Economics Pty. “He’s being more direct on China’s slowdown and the end of the boom. A sense of crisis also helps him cover the budget deficit and debt issues that the opposition has hammered, and allows him to remind people of what he did last time.”

Gillard and Swan’s economic credibility was undercut when they failed to return the budget to surplus last fiscal year as they had promised. Rudd met with the Business Council of Australia today as he tries to mend ties with executives and find ways to spur growth.

RBA Pause

The Reserve Bank of Australia, which has cut its benchmark rate by 2 percentage points since November 2011, left borrowing costs unchanged today at a record-low 2.75 percent. Governor Glenn Stevens said in a statement accompanying the decision that “the economy has been growing a bit below trend over the recent period” and “this is expected to continue in the near term as the economy adjusts to lower levels of mining investment.”

Policy makers are trying to revive employment-intensive industries such as construction and manufacturing. Stevens said while the local dollar “remains at a high level,” it may “depreciate further over time, which would help to foster a rebalancing of growth.”

Prospects for RBA cuts as the Federal Reserve considers paring back its stimulus drove the Aussie down 12 percent last quarter, the biggest slide worldwide after the Syrian pound.

Talking Down

While “talking the economy down” can weigh on sentiment, the linkage from sentiment to activity is weak, Michael Blythe, chief economist at Commonwealth Bank of Australia in Sydney, wrote in a note to clients dated today. “One reason for this weak linkage may actually be that fears about the outlook generate a response by policy makers and consumers that ultimately reduce activity risks.”

Rudd, who faces an election due by Nov. 30, has already boosted the government’s standing. A Newspoll conducted June 28-30 and published in The Australian newspaper yesterday showed the Abbott-led opposition in front of Labor by 51 percent to 49 percent on a two-party basis, designed to gauge which party is most likely to form government under Australia’s preferential voting system. That’s down from a 14 percentage-point gap a week ago.

China Manufacturing

Manufacturing in China, Australia’s biggest trading partner, expanded at the slowest pace in four months in June, and growth in the world’s second-largest economy probably eased for a second straight quarter, according to the median estimate of a Bloomberg News survey. Since reclaiming the leadership, Rudd has highlighted Australia’s challenge, noting trade with China now accounts for about 10 percent of his nation’s economy.

Australia can’t rely on a sole source of growth and must boost manufacturing, services and agricultural industries, Rudd said in Newcastle yesterday as he announced his new ministry. This should be achieved “by making full use of the falling exchange rate, which in fact boosts our global competitiveness, and to enhance our productivity,” he said.

Rudd’s new treasurer, Chris Bowen, told reporters in Sydney today that “there’s a transition to manage,” when asked if the government is reframing the economic message.

Gillard, by contrast, found that highlighting job growth had little resonance in areas such as western Sydney, a traditional Labor heartland that polls indicate is becoming more competitive. Keith Darley, a 34-year-old electrician, said earlier this year that voters in the area were “sick of hearing everything’s great when they know it’s not.”

Garnaut Echo

Rudd’s assessment of Australia’s outlook echoes that of Garnaut, who served as ambassador to China from 1985 to 1988 when Rudd was a newly arrived diplomat. Rudd commissioned Garnaut to undertake an independent study on the impact of climate change on Australia’s economy, a policy area followed up by Gillard with legislation to introduce a carbon tax.

Garnaut said in a speech five weeks ago that the Australian dollar needs to depreciate “many times further” and China’s resource demand has passed its peak and “will soon end.”

“If we continue within the political culture of the later years of high prosperity, ‘‘Business as Usual’’, we will live in greater comfort for a short while,” Garnaut, one of the nation’s foremost economists and an architect of the floating currency, said in the May 28 speech. “But sooner rather than later we will experience deep economic recession with high unemployment -- probably unemployment rising with each new recessionary episode without falling much in the years between.”

Garnaut declined to comment, his office said today.

Rudd, in his first press conference since resuming as prime minister, echoed Garnaut’s views on the world’s most populous nation.

Economic Challenge

“The huge outstanding economic challenge for us is the end of the China resources boom,” he told reporters in Canberra on June 28. “This will have a dramatic effect on our terms of trade, a dramatic effect on living standards in the country, a dramatic effect also potentially on unemployment unless we have an effective counter-strategy.”

Australia is headed for an election with a slowing economy, weakening labor market, falling currency and budget in deficit. In the five years since the global financial crisis, Australia grew at the fastest average pace among major developed nations, underpinned by government stimulus and the extension of a once-in-a-century resources boom to meet Chinese demand that soaked up excess labor.

Austerity Approach

Rudd last week warned that a government led by his opponent Abbott would adopt an austerity approach similar to that of Britain.

Under such a scenario, “he will tip Australia into recession and bring about significant unemployment,” Rudd said last week. “And what I know from economic history in this country is that once you’ve done that, it takes so long to get people back into employment.”

Spain, where joblessness is 27 percent, will today release registered unemployment for June that will probably show a 100,000 drop from a month earlier, according to a Bloomberg survey. In the U.S., factory orders will likely show a 2 percent rise in May from April.

In Australia, Goldman Sachs Group Inc. economists estimated in a report last month there’s a 20 percent chance the economy will fall into recession -- defined locally as two consecutive quarters of contraction -- even after the central bank cut rates to a record-low 2.75 percent. Saul Eslake, chief Australia economist for Bank of America Merrill Lynch in Melbourne, projects a 25 percent chance for 2015.

“Kevin Rudd is right to be concerned about some of the risks to the Australian economy, and to be thinking about how best to counter them,” said Eslake, who has analyzed Australia’s economy as a financial economist for a quarter century. “If he, like other successful reformers before him, is able to use the threat of a crisis, or the reality of one, as a spur to reform, then history will judge him well.”