Fundamentals keep AAA-rating solid, says S&P

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

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 in the rating 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.

Fresh Bureau of Statistics data showed building activity slowed in the December quarter, thanks to a decline in activity 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 appears vulnerable to a downturn, and that high household debt levels could make household 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."

But the report is more positive than past efforts, and spends more time praising Australia's relatively high national savings rate - about 25 per cent of gross domestic product, compared to the average for advanced economies of 19 per cent.

A week ago, Britain became the latest Western economy to lose its triple-A rating after 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 on Wednesday showed local building activity slowed in the December quarter.

Building activity growth declined by 0.1 per cent, a figure that was slightly worse than market expectations of 1 per cent growth overall.

But economists said the result was better than it looked because the entire 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 actually rose by 2.5 per cent in the quarter, the fourth straight month of growth.

"Dissecting today's 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," said David De Garis, an NAB economist.

"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.

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