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. Rudd’s language puts him more in tune with voters than the message of prosperity and employment growth emphasized by Gillard and former Treasurer Wayne Swan

Australia Recession Risk Flagged by Rudd in Rhetoric Shift

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, Rudd’s language puts him more in tune with voters than the message of prosperity and employment growth 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 amid global turmoil, 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 is meeting with the Business Council of Australia today, his office said, as he tries to mend ties with executives and find ways to spur growth.

RBA Meeting

The Reserve Bank of Australia, which meets to set policy in Brisbane today, has cut its benchmark rate by 2 percentage points since November 2011 to revive growth in employment-intensive industries such as construction and manufacturing. Swaps traders are pricing in a 20 percent chance Governor Glenn Stevens and his board will lower the cash rate to 2.5 percent.

Prospects for RBA reductions 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.

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 (CBA) 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 Bounce

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.

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.

Boost Productivity

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.

Gillard, by contrast, found her message of 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.”

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.

Boom Over

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.

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.”

Recession Risk

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.”

To contact the reporter on this story: Michael Heath in Sydney at mheath1@bloomberg.net

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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