Weakened Abbott Holds Less Sway to Fix Worst Economy in 24 Years

Australian Prime Minister Tony Abbott’s diminished mandate after a leadership challenge risks making it tougher for him to address the weakest economy in a generation.

With gains in tax revenues slumping, Abbott already faced a challenging job to prepare the annual budget for the fiscal year beginning July 1. Now he’ll have to craft it under a political cloud with almost 40 percent of his parliamentary colleagues voting Monday to unseat him. The scale of the party rebellion suggests political instability will persist.

“Ongoing uncertainty over leadership and policy direction is likely to remain a negative for business confidence, which is already languishing below its long-run average, with implications for business expenditure on both capital and labor,” said Su-Lin Ong, the head of Australian economic and fixed-income strategy at Royal Bank of Canada in Sydney. That is likely to pressure the central bank to cut interest rates further to support the economy, she said.

Here’s what the economic environment that Abbott faces looks like:

* The longest stretch of weak expansion since the 1991 recession

Gross domestic product growth is on track to be below its 30-year average rate for six of the past seven years. The Reserve Bank of Australia Feb. 6 lowered its forecast average expansion for 2015 to between 1.75 percent and 2.75 percent.

* Government debt as a proportion of GDP is highest since 1996

Abbott’s conservative predecessor, John Howard, elected in 1996, paid off Australia’s debt before embarking on tax cuts and middle-class welfare payments financed by the mining boom. Following the 2008 global financial crisis, as revenue failed to meet expectations, the then-ruling Labor party borrowed to continue financing expenditure. Abbott now confronts the crunch of tax increases or welfare cuts, a task bordering on impossible in the current political environment. The ruling coalition lacks a majority in the Senate, which has blocked proposed policy changes. Popular support for the government fell 3 points to 43 percent while that for Labor rose 3 points to 57 percent, according to the latest Newspoll published in the Australian newspaper Monday.

Net debt as a proportion of GDP is forecast to rise to 15.2 percent in 2014-15, the highest since 1996-97.

* Business confidence at its weakest since the end of the Rudd-Gillard-Rudd government

Corporate sentiment surged with the election of the Abbott’s Liberal-National coalition after three years of minority government and leadership chaos. It has since trended lower as frustration with the new administration grows.

“Political instability dramatically affects business confidence,” said John Osborn, director of economic and industry policy at the Australian Chamber of Commerce and Industry in Canberra. “Business is looking for a unity of purpose from government to fix the problems with the budget and to get the economy back on track.”

Echoing those sentiments, Saul Eslake, chief Australia economist at Bank of America Merrill Lynch, said: “Business put a lot of store by the change of government in 2013, and I think they have become either increasingly disenchanted with the performance of the government or increasingly frustrated with its inability to get its legislation through.”

* Australian unemployment has held above 6 percent for the longest stretch since 2003

The RBA said the economy is set to grow slower than previously forecast, and joblessness is likely to rise higher and remain there longer than earlier seen.

* Key commodities are at the weakest level in five years

The price of iron ore, Australia’s biggest export, has collapsed about 50 percent as China’s economy slows, and the plunge in the oil price has hurt the prospects for the nation’s developing liquefied natural gas industry, whose Asian contracts are linked to crude. The Reserve Bank of Australia’s commodity price index fell 19 percent in Australian dollar terms in January from a year earlier.

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