Australia's Abbott set to inherit economy others would envy

SYDNEY Wed Sep 4, 2013 6:53pm EDT

Opposition leader Tony Abbott talks during the People's Forum with Australian Prime Minister Kevin Rudd in Sydney August 28, 2013. REUTERS/Lukas Coch/Pool

Opposition leader Tony Abbott talks during the People's Forum with Australian Prime Minister Kevin Rudd in Sydney August 28, 2013.

Credit: Reuters/Lukas Coch/Pool

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SYDNEY (Reuters) - Australia's presumptive prime minister, Tony Abbott, is set to inherit a slowing economy, rising unemployment and a budget in the red. Yet look out to a three-year election horizon, and the view is a lot better.

Abbott's conservative Liberal-National coalition appears to be a shoe-in at elections this weekend, ending six years of Labor rule, and all the talk has been of the challenges he faces.

Chief among those are worries about a substandard economy and the pressure it's putting on public coffers -- fears which have in large part been fanned by Abbott's coalition while in opposition. Indeed, the last recession was more than two decades ago and government debt is relatively low and manageable.

And any economic pain is likely to be concentrated in the near term, where blame can be conveniently laid at the feet of the former government.

It also helps that the starting point is not as bad as many feared. Government figures out this week showed the economy grew by 0.6 percent in the June quarter and a steady 2.6 percent for the year, defying speculation of a much deeper slowdown.

That is short of the 3.25 to 3.5 percent pace that Australians have come to think of as "normal", but the economy is still consistently faster than any other developed nation.

Most economists expect growth to stay around 2.5 percent for a few more quarters, but further out things are brighter.

For instance, Reuters' latest poll of global banks found they expected economic growth to quicken to 3.1 percent over next year.

The Reserve Bank of Australia (RBA) is confident growth will accelerate to an above-average pace by 2015 -- its forecasts even stretch as high as 4.25 percent.

With another election not due until 2016, such an outcome would put Abbott in the driving seat to win a second term.

FORTUNATE TIMING

Developments offshore should also augur well for Abbott, with a marked improvement in economic news from the rich world in the past month or so.

The United States has gained enough traction that the Federal Reserve can consider reining back on stimulus, while Europe has emerged from recession.

Japan has boasted its best growth in years, and fears of a hard landing for China have faded in the face of better data on manufacturing and trade.

The latter is particularly good news for Australia as the Asian giant takes fully a third of its exports and is by far the biggest consumer of its iron ore, a A$60 billion-a-year boon to its trade accounts.

Indeed, figures out Thursday showed no slacking in demand for the ore. Australia's Port Hedland, which handles about a fifth of the global seaborne market for the steel-making material, reported shipments to China rose 9 percent in August, up a hefty 33 percent on the same month last year.

"Finally, all the evidence now points to a renaissance of growth in the advanced economies," said Scott Haslem, an economist at UBS.

He noted that while instability in some emerging markets, such as India and Brazil, had garnered a lot of headlines, those countries accounted for only 12 to 13 percent of global output.

In comparison, the economies that were stabilizing, which includes China, were four times larger at 55 percent of output.

"This suggests greater upside risks, than downside risks, to global growth from here."

Another timely blessing for Abbott has been the decline in the Australian dollar. For almost all of the last three years of Labor government it had been punishingly high, hollowing out manufacturing and crimping export earnings.

Since most of Australia's resource exports are priced in U.S. dollars, a high local currency lessens returns to miners, and so profits and tax receipts.

Fortunately for Abbott, then, that the currency has fallen by 14 percent since April, delivering a major windfall to miners and the next government's bottom line.

The RBA has made much of research that implies a 10 percent decline in the currency will stimulate economic growth by between 0.5 and 1 percentage point over two years.

"The Aussie is once again playing its traditional role as an income buffer," said Michael Blythe, chief economist at Commonwealth Bank of Australia.

"The main beneficiaries of this income buffering should be corporate profits and government tax revenues related to that profit story."

NO AUSTERITY PLEASE, WE'RE AUSTRALIAN

Having spent the past three years excoriating the Labor government for running deficits and accusing it of taking debt to crisis levels, Abbott has since abandoned all pretence of trying to get into the black in his first term of office.

Net government debt is expected to peak at 13 percent of GDP in the year ending June 2015, and the budget deficit for the current fiscal year is forecast at $30 billion, equal to 1.9 percent of gross domestic product.

Abbott's earlier stance on the deficit had raised the prospect of a dose of European-style austerity, which is now widely seen as having needlessly deepened the recession in Europe and actually only added to government debt problems.

Such was the threat that it moved U.S. Nobel Prize-winning economist Joseph Stiglitz to write a warning piece for the Sydney Morning Herald newspaper this week.

"The political spotlight has fallen on the perceived problem of government debt, with alarming proposals to bring austerity 'down under'," Stiglitz wrote.

"Proposals for substantial budget cuts seem particularly misplaced at this time given that Australia's economy is confronting new global challenges."

Yet he needn't have worried, because a return to budget surpluses now sounds more of an aspiration than a target.

Instead, Abbott conjured up a 10-year timetable to reach a "believable surplus", a distant goal that would also require his party to win three elections in a row, and told ABC television he was aiming for relatively modest savings.

"I don't think anyone is going to think at the end of this week, 'My God, there is this massive fiscal squeeze coming.' If anything, what they will think is there has been a massive scare campaign," Abbott reassured viewers.

(Editing by John Mair and David Gregorio)