Australian economy on sound path: S&P

AUSTRALIA'S housing market appears vulnerable to a downturn and its economy is becoming increasingly exposed to China's business cycle.

But the country's strong fundamentals support its AAA sovereign rating and mean steep falls are "highly unlikely", ratings agency Standard & Poor's says.

A new report on Australia's sovereign credit rating says the economy is likely to keep growing steadily, despite a forecast peak this year in mining investment and the related dip in economic activity.

It comes as Bureau of Statistics data shows building activity slowed in the December quarter because of a decline in the big-ticket engineering construction sector.

The S&P report said Australia remained on a "sound path", with strong institutions and low public debt and a financial system that "appears sound".

But it reiterated concerns that the country's housing market appeared vulnerable to a downturn and that high household debt levels could make people's finances less resilient to economic shocks.

"The sustainability of high household debt levels has not been tested in an environment of high unemployment for a long time," the report warned. "[And] Australian house prices, relative to household incomes, are also elevated.

"While there has not been a build-up of aggregate excess supply, the housing market continues to appear somewhat vulnerable to a downturn, in our view."

The report is more positive than past updates and praises Australia's relatively high national savings rate - about 25 per cent of GDP, compared with the average for advanced economies of 19 per cent.

It comes a week after Britain became the latest Western economy to lose its triple-A rating, as Moody's lowered its rating to double-A1, with a stable outlook, citing the country's commitment to austerity policies and the likely dampening effect they would have on the economy.

Bureau of Statistics data released on Wednesday showed building activity slowed in the December quarter of 2012, declining by 0.1 per cent, a figure slightly worse than market expectations, which were for 1 per cent growth overall.

But economists said the result was better than it looked because the decline came from a 1.3 per cent fall in activity in the big-ticket engineering construction sector.

When isolated from the rest of the data, private building activity rose by 2.5 per cent in the quarter, the fourth straight month of growth.

"Dissecting [the] report reveals signs of life in the domestic private building industry through last year, signs that were a little more noticeable in the second half," NAB senior economist David de Garis said.

"Private residential activity overall through last year netted 0.8 per cent growth, [which is] not what you'd term 'rapid' but something positive anyway."

Australia is one of just a few countries with a triple-A rating and a stable outlook from all three major ratings agencies.