New Aussie Prime Minister welcomed by country's mining giants

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By Palash R. Ghosh | June 25, 2010 7:49 AM EST

Julia Gillard became the first woman Prime Minister in Australia's history, after Kevin Rudd was ousted in a bloodless “coup d'etat” within the country's ruling Labour Party.

Rudd, whose fate was sealed when he proposed a gargantuan 40% tax on the earnings of mining companies (Australia's largest industry), relinquished party leadership to his former Deputy, Gillard, rather than face the embarrassment of an election he would surely lose.

According to press reports, Gillard seeks to negotiate and compromise terms of the unpopular resource “super-profits” tax with top mining companies like BHP Billiton Ltd., Fortescue Metals Group Ltd. and Rio Tinto.
In a response statement, BHP indicated it was “encouraged” by Gillard's ascension to the top job.

The Super Profits Tax was scheduled by Rudd to become effective
in July 2012, but the mining industry already campaigned feverishly against it, citing it would cost jobs and hurt domestic investment.

“While the shift in leadership is unlikely to cause any big shift in government policy over the near-term, the removal of Rudd may bolster hopes for the removal of the poorly received Resource Super Profits Tax,” said a report on Action Economics.

In a research note to clients, Su-Lin Ong, senior economist at RBC Capital Markets, wrote she expects Gillard to announce a “watered-down version” of the Super Profit Tax in the coming weeks.

But what kind of impact will the new Prime Minister have on the broader Australian economy? Not much probably.

“While the political change is significant, we suspect that the economic impact will be minimal,” said Sukhy Ubhi, international economist at Capital Economics.

“The [Australian] budget was only recently announced and the Labour Party’s key policies will likely stay in place.”

The main change, if any, Ubhi stated, would be on the super profit-tax, “although to what extent that would be watered down is unclear at this stage. Our view is that it is sensible to distribute the gains from Australia’s mining boom to the rest of the economy, but the exact details of how and to what extent this is done are obviously open to discussion.”

The bigger picture is that the Australian economy experienced only a shallow downturn and looks set for above-trend growth in coming years, Ubhi added.

Indeed, Australia has weathered the global financial crisis fairly well, partially due to robust commodity/natural resources exports to an insatiable China.

Although Australia's GDP growth slowed considerably in the first quarter of 2010 – a seasonally-adjusted 0.5% quarter-over-quarter, versus an upwardly-revised 1.1% gain in fourth quarter of 2009 – that was likely a short-liked anomaly.

GDP should accelerate again soon with private sector investment set to take the lead,” Ubhi said, noting that GDP is now still 2.7% above year-ago levels.

The public sector drove first quarter expansion.

“Government infrastructure-focused investment in areas such as schools, transport and healthcare was strong for the third consecutive quarter,” Ubhi said. “This more than offset the weakness in private sector investment, which was in part due to the ending of tax breaks which shifted spending.”

Private investment should pick up from now on given that business confidence is high, profitability is improving, and capacity utilization is rising, he added.

Australia has an unemployment rate of 5.2% (as of May 2010, according to the Reserve Bank of Australia), far below its industrialized peers in Europe and the U.S,

“Employment gains have been rapid and the tightening of the labour market has put upward pressure on wages, which should
support spending in coming quarters,” Ubhi said.

GDP growth will be partially driven by continued strong medium-term demand for Australia's commodities. “This will lift domestic incomes and support GDP as well,” Ubhi said.

However, core inflation has been rising over the past year – it is now at 2.9%, at the upper end of the Reserve Bank's target range.

The Reserve Bank recently kept its policy (cash) rate unchanged at 4.50%, which is regarded as a neutral setting.
“We still anticipate more tightening and see the cash rate ending this year at 5.00%, and then rising further in 2011,” Ubhi forecast.

As for Gillard, having made some conciliatory gestures to the powerful mining industry, she will have to negotiate a new tax deal that will appease both mining executives and the unions/left-wing politicians who are demanding that mining bossses share more of their wealth with the public.
Gillard also said she will call for a general election in the “coming months.”

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