The leadership change: What it means
Summary: This is an edited version of an economics update released earlier this week to global investors by HSBC, interpreting the latest Labor leadership change. It notes that political uncertainty, and the timing of the federal election, could impact on the willingness of the Reserve Bank to make further changes to monetary policy, unless urgently required. |
Key take-out: A near-term cut to rates is now less likely, though recent large moves in the $A significantly swamp the politics of the situation. |
Key beneficiaries: General investors. Category: Economics and strategy. |
A leadership challenge has brought Australia a new Prime Minister. Kevin Rudd, a former Prime Minister, challenged Julia Gillard in an internal party contest and won. Both are from the left-leaning and current governing Australian Labor Party. Kevin Rudd assumes the prime ministership, but is required to hold a Federal election before 30 November. Economic implications are on the margin but the leadership change may lift business confidence and could have implications for the timing of any further near-term RBA move, given their desire to stay out of the political spotlight.
Implications
The political implications are that the forthcoming election will likely be more closely contested, given polls taken prior to the leadership change placed Kevin Rudd as significantly more popular than Julia Gillard.
As most economic allocation decisions in the Australian economy are made in response to market pricing signals and the economy is deregulated, politics typically has a limited effect on the Australian economy. In this case, however, there may be some economic implications, on the margin.
First, an earlier election could reduce business uncertainty, although the greater popularity of Rudd, compared with Gillard, could make it a closer election and thus it could deliver a less certain mandate to govern. Though hard to determine, I see the overall effect as likely to be positive.
Political uncertainty due to the lack of popularity of the Gillard government and the long lead time to the forthcoming election – calling for a poll nine months in advance is highly unusual in Australian history – are likely to have put some downward pressure on local business confidence in recent months. Until an election is held, this political uncertainty is likely to persist.
Second, Rudd's move is likely to make the upcoming Federal election more tightly contested, which makes it less certain that Australia could have a change of government and therefore less clear that there will be a big shift in the policy environment. Tony Abbott, the leader of Australia's opposition party, the Liberal Party (Australia’s conservative party), has indicated that if he won office he would remove the carbon and mining taxes.
Third, political uncertainty about an election could be a factor in the timing of any further RBA changes to monetary policy.
While the current governor of the RBA, Glenn Stevens, has already demonstrated the independence of the RBA's decisions from politics, by lifting the cash rate 21 days before the late 2007 election, the RBA does typically seek to avoid the political spotlight. However, the uncertainty about the timing of the forthcoming election could affect the RBA’s willingness to make near term policy moves unless urgently required.
A near-term federal election could be called for as soon as 3 August. If this occurred, it would fall very close to the RBA’s August meeting, scheduled for 6 August. The 6 August meeting follows the all-important Q2 CPI result.
On the margin, this makes a near-term cut to interest rates a bit less likely, though recent large moves in the $A significantly swamp the politics of the situation in terms of their importance for determining the next interest rate move. I see another RBA cut in August, after the Q2 CPI, as more likely than not, but political uncertainty and recent big moves in the currency make it far from assured.
Bottom line
Australia will have a new prime minister as Kevin Rudd (himself a former prime minister), as he won a leadership challenge against Julia Gillard overnight.
A Federal election is required before 30 November, but could be held as soon as 3 August, with Kevin Rudd likely to be running against opposition leader Tony Abbott.
Economic implications are on the margin but could include an effect on business confidence and may affect the timing of any near-term future moves by the RBA.
Paul Bloxham is chief economist (Australia and New Zealand) for HSBC.