Australia Business Sentiment Slumps as Budget Blowout Confirmed

Australian business confidence slumped to an eight-month low and Treasury confirmed a blow out in the fiscal deficit, complicating Prime Minister Kevin Rudd’s bid for re-election based on an economic management pitch.

The confidence index for July fell to minus 3, according to a National Australia Bank Ltd. survey released today of more than 400 companies taken July 25-31. Sentiment remained “extremely poor” in the key mining industry as interest-rate cuts and a weaker currency failed to encourage companies, NAB Chief Economist Alan Oster said.

Treasury, in its pre-election economic and fiscal outlook released today, predicted a budget deficit of A$30.1 billion ($27.4 billion) in the year to June 30 as the economy slows and unemployment rises. It said mining investment is likely to peak at a lower level because of “increased uncertainty about global growth prospects, particularly in China and India.”

Australia’s deteriorating fiscal position underscores the constraints facing Rudd, 55, and opposition leader Tony Abbott, 55, in the final four weeks of the campaign. Today’s business confidence result was the worst since November 2012 and the business conditions gauge, a measure of hiring, sales and profits, held at minus 7.

“The sheer mathematics of marginal seats and swings required imply a Coalition victory under Tony Abbott, as Labor needs to win new seats, not just keep existing ones,” said Annette Beacher, head of Asia-Pacific research in Singapore at TD Securities. “Our concern is that a Labor victory could confine business confidence to the doldrums for another three years, dampening investment and employment for longer than is necessary.”

Domestic Drivers

Australian policy makers are attempting to engineer a transition toward domestic drivers of growth including employment-intensive industries such as housing construction as a once-in-a-century mining-investment boom peaks.

“This transition is proceeding broadly as expected, although the expected peak in investment is lower than at budget, with the sector having become increasingly cautious in the allocation of capital,” Treasury said today. “This follows increased uncertainty about global growth prospects, particularly in China and India, and rises in domestic costs.”

The 2014-15 deficit is expected to be A$24 billion and the 2015-16 shortfall is now seen at A$4.7 billion, the documents showed. A 2016-17 surplus of A$4.2 billion was projected.

Best Leader

Rudd is selling himself as the best leader to steer Australia through a downturn as he flags the end of a China-led mining boom, ditching the optimism of predecessor Julia Gillard. Employers including Ford Motor Co. have cut jobs, and the central bank says growth is likely to remain below trend in the near term.

The Reserve Bank of Australia has reduced borrowing costs eight times -- for a total of 2.25 percentage points -- since November 2011 as the local dollar’s strength dragged on growth and a mining investment boom crests.

“Forward indicators provide little hope that demand will improve in the near term, with forward orders, stocks and capacity utilization all remaining well below long-run average levels,” NAB’s Oster said in the report. “It is also possible that uncertainty over timing of the federal election kept businesses wary during the month.”

With signs of a slowdown in the world’s 12th-largest economy, including worsening employment prospects and a waning of the mining boom, Abbott’s conservative coalition has attacked Labor’s economic management as it seeks to win office for the first time since 2007.

Abbott Pressure

Treasury’s pre-election statement also intensifies pressure on Abbott to release funding plans for his policies now that the final budget position is in place ahead of the poll.

“It is D-day for Mr. Abbott when it comes to announcing his own budget bottom line,” Rudd told reporters in the Queensland city of Townsville today before the release.

The coalition maintained its 52 percent to 48 percent lead over Labor in the two-party preferred measure, according to a Newspoll published in The Australian newspaper yesterday. Labor’s primary vote fell two points from the previous poll a week earlier to 35 percent, the coalition rose two points to 46 percent, and the Greens also gained two points to 11 percent.

Rudd is burnishing his record as leader through the 2007-2009 financial crisis, when Australia sustained growth as much of the developed world slid into recession. Since replacing Gillard, the former diplomat has announced plans to scrap the world’s highest carbon price and accelerate the move to emissions trading in 2014, costing the government about A$3.8 billion over four years.

He’s also announced plans to try to staunch an influx of asylum seekers entering Australia by boat, and changed Labor’s rules for selecting its leader.

Abbott has vowed to scrap carbon pricing and a 30 percent levy on iron ore and coal mining company profits if he wins office. He’s pledged to cut the tax rate for companies, a cheaper national broadband network, and using the military to escort asylum seeker boats out of Australian waters.

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