Australia – Leadership Change Brings Uncertainty

Prime Minister Tony Abbott has been ousted as leader of the main governing LP, and will be replaced as head of government by Malcolm Turnbull, who convinced enough of his party colleagues that the coalition of the LP and its traditional partner, the NP, would lose a general election that falls due next year if the increasingly unpopular Abbott remained at the helm. Turnbull has indicated that the current government will serve out its full term, and assured that his would be “a thoroughly Liberal government,” signaling that no significant policy changes are in store.
Although Abbott led the Coalition to a landslide victory at a general election held in 2013, polling data indicating a lack of public trust in his leadership abilities left him vulnerable to a challenge from Turnbull, whose previous turn as head of the LP ended in December 2009, when internal disagreement over whether to oppose the carbon tax proposed by the ALP government triggered an internal rebellion, forcing a leadership contest that Abbott won by a single vote.
That history made it inevitable that the move against Abbott would be compared to recent leadership battles in the ALP, which involved Julia Gillard leading a push to oust Prime Minister Kevin Rudd just three months before the 2010 elections, only to have Rudd return the favor three months before the last elections. The perception of instability at the top of the ALP was among the factors that contributed to the party’s bruising defeat in September 2013, and many Liberal supporters fear that voters will similarly penalize the LP in 2016.
As prime minister, Abbott was prone to embarrassing gaffes, and his government has suffered some minor scandals. However, his biggest weakness was the perception that he was not up to the challenge of reviving a slumping economy. The 2015/2016 budget failed to address public concerns on that score; indeed, doubts were reinforced by the obstacles the budget encountered in the lower chamber of Parliament, where the governing parties control a comfortable majority of seats.
In terms of the risks for investors, it is noteworthy that Turnbull is among the most vocal advocates within the LP of an aggressive carbon-reduction program. That does not mean that he favors—or could rally the necessary support for—the revival of the ALP’s carbon-tax scheme, which was abolished last year, in fulfillment of one of Abbott’s key campaign pledges. But it does point to a lack of consensus among the Liberals that will contribute to uncertainty on the issue of Australia’s emissions policy that, as long as it persists, will create a deterrent to investment in projects in which the specifics of emissions rules have significant cost implications.
Real GDP growth accelerated to 2.7% in 2014, but weaker Chinese demand has contributed to a near-halving of the price for iron ore, which accounts for about 20% of Australia’s export revenue. In the near term, conditions in the mining sector will not be conducive to capital investment, and with the unemployment rate remaining stuck above 6%, consumer spending is unlikely to strengthen sufficiently to take up the slack. The economy grew by a scant 0.2% (quarter-on-quarter) in April-June 2015, prompting warnings about the potential for economic recession, particularly given the clear evidence that Chinese demand can no longer be relied upon as a bulwark against global shocks. Real GDP growth is forecast to slow to 2.4% this year, with the risk of the pace of expansion coming in below the forecast significantly greater than the prospects for an upside surprise.