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• Australia’s ‘AAA’ Sovereign credit rating from S&P is currently on negative outlook (where it has been since April 2020). Australia has held a AAA rating since Feb 2003). There has been some speculation that Australia’s AAA rating may be downgraded by one‑notch to ‘AA+’ in the wake of the Federal Budget.
• NAB’s view is Australia will likely hold onto its AAA credit rating despite budget deficits being most recently projected all the way to 2031-32. S&P noted that for Australia to retain the ‘AAA’ credit rating it expected fiscal deficits “to narrow toward their long-term trend over the next two to three years”. While the government priority of lowering unemployment below 5% could run counter to this, S&P also pointed out that its expectations of Australia’s economic and fiscal recovery were stronger than those contained in the government’s October 2020 budget.
• Delving into S&P’s negative outlook back in 2020, S&P noted that the outlook could revert to stable “if the general government fiscal balance improves in line with our expectations as the economy recovers or if Australia’s external position improves”. As for the chances of a downgrade, that could occur “if the COVID-19 outbreak causes economic damage that is more severe or prolonged than what we currently expect”. Clearly this is not the case with the unemployment rate at 5.5% well below the 5.9% rate which S&P assumed in their calculations for FY 21.
• Looking at S&P’s sovereign credit rating methodology also suggests a downgrade is less likely. We think S&P’s assessment of the qualitative component of the rating should be stronger than at the time that S&P placed Australia on a negative outlook given the sharp recovery seen in the economy. As such, a rating downgrade is likely not imminent and indeed, a revision of the outlook back to stable is conceivable if the current positive trends continue and the government switches focus to consolidation.

The week ahead

• Australia: Pre-GDP partials of Construction Work Done (Wednesday) and Capital Expenditure (Thursday) are out this week with consensus looking for strong prints in both. Q1 GDP partials to date have been on the soft side, so strong investment partials will be required to shore up our Q1 GDP expectation of 1.1% q/q. Also out in the week is Weekly ABS Payrolls on Tuesday and the Preliminary Goods Trade on Monday.
• International: Offshore the week is relatively quiet with focus on the RBNZ and the US PCE Deflators. NZ: the RBNZ meets on Wednesday where the RBNZ will need to recognise the recent strength economic data with its cautious messaging around the policy outlook; CH: Industrial Profits are on Thursday where focus will be on whether the lift in the PPI is hampering profitability; US: Durable Goods is on Thursday, while the PCE Deflators on Friday will be closely watched for signs of inflationary pressure.

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