The mid-year economic and fiscal update on Monday will make an unconvincing case for sparing the Australian economy a credit rating downgrade that will almost certainly mean losing its triple-A designation.
The surge in commodity prices will at most serve to offset the deterioration in the economy since Treasurer Scott Morrison's federal budget in May, economists say. Australia posted a surprise contraction in the third quarter when gross domestic product fell by 0.5 per cent.
Futures indicate the S&P;/ASX 200 Index will slip 4 points or 0.1 per cent when trading reopens. That follows small falls on Wall Street Friday when the Dow Jones Industrial Average again failed to cross the 20,0000 points level, closing at 19,843.41, and the S&P; 500 fell 0.2 per cent to 2,258.07 points.
The Australian dollar traded as high as US73.70¢ before settling at US73.04¢ and the 10-year Australian bond yield is at 2.828 per cent.
Iron ore is flat at $US81.49 a tonne and the spot oil price rose 2 per cent to $US51.90.
If ratings agencies S&P; and Moody's go ahead with the cut, experts think the worst of the fallout will be political. S&P; put markets on standby back in July when it moved the country's sovereign rating to a negative outlook, the precursor to a downgrade.
"I just get the sense the ratings agencies are ready to do it finally and the Treasurer doesn't usually use this as a forum to change policy or announce new measures so I don't see what he could do," said Paul Dales, chief economist at Capital Economics. Even if the MYEFO paints a positive picture, "the ratings agencies will just see through it. Time's up".
"My sense is weaker wage growth and a weaker economic backdrop would offset any boost from high commodity prices. The Treasurer should conclude that the budget deficit is going to be bigger in each of the next four years," Mr Dales said. "It looks extremely careless to be the first government in 30 years to lose the triple-A rating. That will pretty much go on your Wikipedia page and stay on it."
In anticipating any reaction, "I don't think anyone gives a hoot about it," he said. "Whether they do it on Monday afternoon or three months' time, it's gone."
Credit ratings differentiate between the quality of borrowers, that means a lower rating should warrant a higher cost of debt. Mr Dales says that's true in theory, but Australia's fiscal position is no secret and it was still a highly regarded economy with a stable financial system. The Big Four banks and the triple-A rated states will be lowered one notch by default if the sovereign rating is revised.
"The theory here is, if the government is not rated as strongly, it's going to be harder for them to bail out the banks or the states," Mr Dales said. He strongly disagrees with that reasoning, arguing that the government's ability to rescue banks and states is not impaired. The bigger risks to the economy are a slowdown in China or a downturn in the housing market, both of which offshore investors are alert to.
"Governments around the world have been faced with the lowest borrowing costs in a couple of generations and they've not done anything with it. Especially a country like Australia whose fiscal situation isn't that dire," Mr Dales said. "It should have seen the opportunity."
The Reserve Bank of Australia minutes from its December meeting are due on Tuesday. Economists are expecting growth of 0.9 per cent for the fourth successive quarter when New Zealand posts its third-quarter GDP update on Thursday, putting it on track for annual growth of around 3.7 per cent. NZ's trade balance data is released on Wednesday which should show a narrowing of the deficit.