Asia seen as key to medium-term growth

SYDNEY - The outlook for Australia's economy is positive with continuing strong growth from Asia expected to boost demand for domestic resources and promote investment in the commodities sector, says the Reserve Bank.

However, the central bank also warns that Australia's business cycle will be more closely linked than ever before to Asia and the nation must ensure it remains flexible to respond quickly in terms of labour and capital investment.

Reserve Bank assistant governor of economics Philip Lowe said yesterday Australia's medium-term prospects were good, thanks to its links to Asia.

"As we look beyond the challenges of the global recession, if one is optimistic about the medium-term prospects for growth in Asia, then there are reasonable grounds to be optimistic about medium-term prospects for the Australian economy," Lowe said.

"While there is still much uncertainty about how the world economy will evolve over coming years, Australia finds itself in a better position than most of the other advanced economies.

"This reflects not only our record of sound macroeconomic management and structural reforms, but also our considerable endowment of natural resources."

Lowe said changes in Australia's international trade, higher prices for its exports, as well as high levels of investment and population growth could be linked to the Asia growth story.

"As a result of these developments, Australia's medium-term economic prospects are more closely linked with those of Asia than has been the case ever before," he said.

"Business cycle fluctuations in Asia are also likely to have a bigger effect on the dynamics of the Australian business cycle than has been the case in the past."

Australia had to manage the risks well and be careful with policies to promote growth in the national economy, Lowe said.

"We need to ensure that our economy remains flexible so that labour and capital can move to where they are most useful. ... we need to keep the focus on removing impediments to capacity expansion so that the economy can grow without causing inflation.

"And we need to find ways of housing our rapidly growing population and dealing with the environmental issues that can come with growth."

Investment had been a strong area of growth in the economy, with private sector business investment the equivalent of 17 per cent of gross domestic product over the past year, which was a record, Lowe said.

"Not surprisingly, given the demand for commodities, this strength of investment is most notable in the resources sector," he said.

"According to estimates based on ABS data, mining investment was the equivalent of almost 5 per cent of GDP over the past year, a record by a large margin.

"While we had booms in the mining sector in the late 1960s and the early 1980s, these look relatively small compared with the current one," he said.

Lowe said Australian and international firms have been prepared to invest substantially in the nation's resources and that trend would continue.

"It is plausible that very high levels of investment in the resources sector will continue for some years yet," he said.

"In particular, the outlook for LNG [liquid natural gas] appears to be very positive, with a number of very large projects either under way or on the drawing board."

- AAP