Fundamentals keep AAA-rating solid, says S&P
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.
Frequently Asked Questions about this Article…
S&P said Australia's strong fundamentals — including sound institutions, low public debt and a sound financial system — support its AAA sovereign rating and make steep falls in the rating "highly unlikely." The report expects the economy to keep growing steadily despite a forecast peak in mining investment.
S&P reiterated that Australia's housing market appears somewhat vulnerable to a downturn. The report notes elevated house prices relative to household incomes and warns that high household debt levels could reduce households' resilience to economic shocks — risks everyday investors should watch when assessing property exposure or consumer-facing investments.
The report warns that high household debt hasn't been tested in an environment of high unemployment for a long time. If household finances become less resilient, consumer spending could weaken, which may impact companies reliant on domestic demand and influence investment returns.
S&P praised Australia's relatively high national savings rate — about 25% of GDP versus an average of 19% for advanced economies. A higher savings rate supports fiscal strength and financial stability, helping underpin the country's AAA rating and offering a positive backdrop for investors.
ABS data showed building activity slowed by 0.1% in the December quarter, a touch below expectations. The decline was driven by a 1.3% fall in large engineering construction, while private building activity rose 2.5% in the quarter and private residential activity grew 0.8% over the year — signs of mixed but not uniformly weak momentum in construction.
The report forecasts mining investment will peak this year, which could cause a related dip in economic activity. However, S&P still expects the overall economy to continue growing steadily, implying the mining slowdown may be offset by other sectors.
Australia is one of only a few countries with a triple‑A rating and a stable outlook from all three major ratings agencies. The report contrasts this with recent moves elsewhere — for example, Britain recently lost its triple‑A rating when Moody's downgraded it to double A1.
Investors should monitor housing market indicators (price levels vs incomes), household debt and unemployment trends, mining investment activity, quarterly building and private residential activity data, and national public debt/savings metrics — all of which the S&P report flagged as relevant to Australia’s economic and credit outlook.
Call 1300 880 160
Start a chat
Schedule a call
