The global ratings agency maintained the rating in its latest outlook, noting Australia is relatively insulated from US tariff risks, given its 10 per cent tariff rate and limited direct US export exposure.
“However, domestic demand weakness in China poses a greater external risk, particularly in light of China’s ongoing correction in the property sector and recent slowdown in investment,” the report said.
“Fiscal stimulus in China remains largely infrastructure focused, which provides some support to prices of Australia’s commodity exports.”
Consumption to continue to drive GDP recovery
Following a soft patch in economic activity in 2024 with growth of 1.1 per cent, Fitch expects gross domestic product (GDP) growth to accelerate to 1.8 per cent in 2025, 2.1 per cent in 2026 and 2.4 per cent in 2027.
“Consumption should continue to drive the recovery, with a still-strong labour market and steady improvement in real household incomes, helped by lower inflation, tax cuts and declining debt-service payments,” the report said.
“The contribution of government spending to growth is likely to continue to moderate in line with trends in 1H25.”
Fitch estimates Australia’s potential growth is 2.2 per cent higher than most advanced economies and “AAA” rated peers.
“Underpinning this is our assumption of sustained steady net inward migration and a modest productivity recovery.”
Productivity growth has been subdued in recent years, according to Fitch.
“The government appears focused on productivity reform following its May 2025 re-election, but passage of reforms is likely to be incremental. Australia should benefit from a larger role in global critical-mineral supply chains, as signalled by its recent critical minerals and rare earths agreement with the US, but we do not foresee a repeat of the mining investment boom in the early 2010s.”
Senator Katy Gallagher, minister for finance, said Australia has one of the best budgets in the G20 and the latest rating is a powerful endorsement of Labor’s responsible economic management.
“We’ve made a lot of progress together on the economy and that progress has been acknowledged by the big ratings agencies,” Gallagher said.
In its latest report, Fitch expects government debt to peak at 50.9 per cent of GDP in FY2025–26, up from an estimate of 50 per cent for FY24–25, before declining to 50.2 per cent by FY29–30.
“This is on the high side of the 39.7 per cent ‘AAA’ median. Our forecast assumes federal deficits will stay contained at about 1.0 per cent of GDP.”
Fitch said structural spending pressure presents risks to the fiscal outlook, particularly from the National Disability Insurance Scheme (NDIS), aged care, health and defence costs.
“The government has taken steps to rein in NDIS spending, but risks persist.”
Senator Gallagher added: “We’re delivering substantial reforms to the National Disability Insurance Scheme and aged care system, and we’re paying down Liberal debt which is saving us tens of billions of dollars in interest payments.”
Solid household financial buffers and labour market strength also mean financial stability risk from high household debt is limited.
“Interest payments on housing loans eased to 6.5 per cent of disposable income in Q125, from a peak of 6.7 per cent in Q324, and should fall further, as policy-rate pass-through to mortgages is fast.
“Rising house prices amid strong demand and constrained supply limit negative equity risk.”
One additional 25 bp rate cut in 2025
Fitch is forecasting one additional 25 bp policy rate cut in 2025 and another in 1H26 to a terminal rate of 3.1 per cent
“We forecast inflation to remain within the central bank’s 2–3 per cent target band, though towards the upper end.”
“The labour market has softened, though the unemployment rate remains low by historical standards at 4.5 per cent in September, which supports our view for modest additional easing.
Future weakness
However, Fitch said external finances are a weakness in Australia’s credit profile.
“We forecast a current account deficit over the next few years, though at contained levels of around 2.0 per cent of GDP. Australia has a high net external debt position, which we estimate at just under 50 per cent of GDP in 2025. This compares to a ‘AAA’ median net creditor position of 43 per cent.”
As to whether the rating could be downgraded in the future, Fitch said sustained upward trend in the government debt ratio over the medium term or severe economic or financial sector distress resulting from impaired household debt-servicing ability could lead to a future downgrade.
Another factor would be a significant weakening of external finances.
“For instance, stemming from sustained large current account deficits, spillovers related to an acute slowdown in China’s economy or rising regional geopolitical tensions.”
