The contrast couldn’t have been more telling.
An hour or two before the federal government revealed its latest budget cuts to try and achieve a surplus in the 2012-13 financial year; the country’s credit rating was upgraded to AAA by the last hold-out rating group, Fitch.
The combination saw the local stockmarket enjoy a sharp jump in afternoon trading as traders gave the budget update and re-rating the thumbs up.
As well the Aussie dollar continued its recovery, rising towards parity ($US1) in Australia and past that level in offshore trading overnight; a jump of more than 3c in two days.
Those moves underlined belief in the strength of the Australian economy, which is now more highly rated than America after Fitch put its AAA credit rating on a negative outlook, meaning there’s a one and three chance of a cut very soon.
The US warning was issued hours before the Australian upgrade was announced.
Seeing Standard & Poor’s already has the US on an AA plus rating (and Moody’s on AAA, but wary), Australia’s rating is now superior to that of the world’s biggest economy.
While Fitch saw the US economy doing better over the next one to two years, it put the rating on a negative outlook because of the inability of American politicians to cut spending and control debt, a big difference with Australia which was underlined yesterday.
Fitch upgraded Australia’s foreign currency issuer default rating to AAA from AA+, and also affirmed Australia’s local currency rating of AAA with a stable outlook.
The ratings upgrade reflected Australia’s fundamental strengths ‘‘including its high value-added economy, strong political, civil and social institutions and its flexible policy framework’’, according to a statement quoting Art Woo, a director in Fitch’s Asia Sovereign Ratings group.
Fitch said it saw Australia’s low government debt-to-GDP ratio of 26.3% of GDP in 2010-11, as one of the standout strengths.
In comparison, the median ratio in the AAA rating group was 55.7%.
America’s figure is close to 100%, Japan’s is 200% or more, Germany (AAA rated) has an 80% figure and hard currency Switzerland’s figure is 36% (also AAA).
The ratings agency said the federal government was committed to getting the budget back to surplus by 2012-13, although that could be delayed by a further deterioration in global economic conditions.
But Fitch warned that Australia’s external finances remained weak by AAA standards, although not the worst among ratings peers.
The country’s net external debt was 53.2% of GDP in 2010 and the current account deficit is expected to remain sizable.
That made Australia relatively sensitive to external financing stocks, compared with its peers, Fitch said.
Fitch said the commodity boom was helping Australia’s growth rate, even during the financial crisis.
But it added that the boom also posed risks, as a large downturn in key commodity prices would lead to a sharp reversal in the terms of trade.
Household debt was also high in Australia, after the run-up in housing prices over the last decade and a half. But house prices had been moderating since mid-2010, which should ease concerns that a large bubble had developed, Fitch said.
Fitch’s statement and the budget update came after the Organisation for Economic Co-operation and Development forecast that Australia will have the fastest growth rate in the developed world next year at 4%, equalled only by Chile.
But the OECD is optimistic with the federal government downgrading its growth estimates for the next two years.
The government cut its growth forecast in line with revisions made by the Reserve Bank of Australia earlier this month.
Economic growth for 2011-12 and 2012-13 is now forecast at 3.25% for each year, down from previous forecasts of 4% and 3.75% respectively.
That’s still more than double the 2011 growth rate of 1.8 %, which was slowed by natural disasters including the Queensland floods.
The OECD is expecting growth to slow slightly to 3.2% in 2013.
The OECD says the resources boom and strong terms of trade should offset the negative effects of the high Australian dollar.
But it says stringent spending controls are necessary given declining government revenue and household confidence could be hit by ongoing uncertainty about the global economy.
Driving our growth will be China, as usual.
The OECD forecast that Chinese economic growth will ease to 8.5% in 2012, from 9.3% this year, before climbing back to 9.5% in 2013.
"Weaker activity in China and other emerging-market economies together with modest falls in commodity prices should put inflation in these countries on a downward trend, allowing some easing of monetary policy." the OECD said.
But growth elsewhere will be weak and the eurozone could be a disaster and the US will not be much better.
Under the new estimates released yesterday, the federal government’s planned budget surplus next financial year has narrowed to $1.5 billion from the $3.5 billion forecast in its May budget.
That’s despite the current year’s deficit now projected to blow out to more than $37 billion from less than $23 billion forecast six months ago.
The slowing global economy – including the deepening sovereign debt crisis in Europe – has slashed government revenues, slashing an expected $20 billion across the next 3½ years covered in the budget’s forward estimates.
Federal Treasurer Wayne Swan announced $6.8 billion in net savings over the period. Spending moves and tax ch
