Australian recovery sustainable: Moody's

Colin Brinsden, AAP Economics and Business Correspondent
(Australian Associated Press)

Australia is unlikely to suffer a lasting drop in economic growth, despite being hit by its largest economic contraction on record due to the COVID-19 pandemic, global rating agency Moody's Investors Service says.

Next week's national accounts are expected to show the economy grew in the September quarter after being whacked by a seven per cent contraction three months earlier, which marked the first recession in nearly 30 years.

Moody's, which rates Australia triple-A with a stable outlook, does not expect a weakening in the nation's budget position over the longer-term either.

"The broad diversification of Australian industry, and the flexibility and competitiveness of the economy will support a sustainable recovery over the next few years, with limited likelihood of severe financial stress destabilising the economy," Moody's senior credit officer Martin Petch says.

However, a major driver of Australia's potential growth rate will be the extent to which productivity growth picks up from the relatively weak levels experienced before the pandemic.

Mr Petch says the government's substantial stimulus package highlights Australia's flexibility and capacity to use fiscal policy to support its credit profile in a difficult global economic environment.

"Fiscal metrics will weaken but remain in line with rating peers," he says.

He said Australia also had a strong track record of fiscal consolidation following periods of expansionary policy.

While the debt burdens of states will climb in the fiscal year ending June 2021, Moody's does not foresee a material weakening in the sovereign credit profile as a result.

"Rather, Moody's expects state governments will remain their resolve to implement additional budgetary discipline once the pandemic has passed," the rating agency said on Wednesday.