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Australia's Economic Good Times Ride on China's Expansion


Australia's economic outlook remains one of the best among the world's industrialized countries, with unemployment at nearly 30-year lows after 15 years of uninterrupted growth. Economists say part of that growth comes from trade with Asia - especially China, which is soaking up vast amounts of Australia's natural resources.

These are economic good times and Australians are enjoying rising salaries with low inflation and unemployment. The jobless rates are the lowest in nearly 26 years. And low interest rates have helped economic growth average nearly four percent a year for the past decade. Australia is now heading for a 15th year of economic expansion.

"If you run through the checklist that economists get excited about - the fundamentals that drive the economy, they all look pretty positive really," said Michael Blythe, the chief economist for the Commonwealth Bank of Australia. "We're seeing strong jobs growth, wages growth running comfortably ahead of inflation, so real wages are rising."

Mr. Blythe says Australia's long expansion began with a program of reforms that included opening markets to competition, creating a more flexible labor market and liberalizing the banking system.

"That combination of upward step in growth and a big downward step in inflation is the best evidence there is that we've actually achieved a real economic pay-off from the economic reform effort that's been underway for 20 years in Australia," he added.

Those reforms allowed Australia to rapidly expand economic links with Asia, particularly China.

The Canberra government has signed free trade agreements with Thailand and Singapore, and an agreement with China is being planned.

China now ranks as Australia's third largest trading partner, behind Japan and the United States, and up from ninth place a decade ago. To power its own soaring growth, China needs more and more of Australia's exports, including metals and agricultural goods.

Australia recently signed several major contracts with China, including a $300 million wheat deal and a 25-year, $19 billion contract to supply liquid natural gas. Australian mining companies are reported to be at full capacity to meet demand in China.

Mr. Blythe at the Commonwealth Bank expects exports to China to continue growing. "There's been an enormous shift in a short period of time," he said. "I think we've been quite a big winner from the China story and we're well placed to remain in that position."

However, Brian Redican, the senior economist at Macquarie Bank, warns against relying too much on one market. "Australia is becoming increasingly dependent on China as a key trading partner. Not just in terms of exports themselves but also Chinese companies investing and developing Australian infrastructure. So if there was a downturn in the Chinese economy, that could have quite profound implications for Australia," he explained.

Australian Prime Minister John Howard has made it clear he wants to expand trade with the rest of Asia. This week, he attended the summit of the leaders of the Association of Southeast Asian Nations in Laos to talk about trade and other issues.

Australia's trade with the 10 ASEAN countries stands at $33 billion a year.

Mr. Redican at Macquarie Bank says Australia is well placed to increase trade in Asia. He notes that most of the country's exports do not compete directly with the goods produced in Asia.

"Asia's an exciting place to be. It's where most of the world's growth is going to come from in the next 20 or 25 years and it certainly makes sense to be based there," said Mr. Redican.

But there are concerns about Australia's economic strength. Low interest rates and rising incomes have fueled demand for housing, leading Australians to borrow heavily to buy homes. Personal debt has reached its highest level in 40 years.

Economists fear a sharp rise in either interest rates or unemployment may lead to hard times for many people burdened with debt.

The economic forecasts for Australia in 2005 remain positive, although most developed economies are expected to slow in the coming year. The Australian Financial Review newspaper recently reported that 25 economists expect the country's growth to top three percent - with inflation at 2.5 percent.

Economists say that while global growth may moderate in 2005, Australia can continue its economic expansion by building exports, especially with China.