China's slowing growth will affect the Australian economy as demand for coal and iron ore fall and prices tumble, Access Economics director Chris Richardson said on Friday.

As a consequence, the Australian government may need to run a deficit budget temporarily, he told ABC Radio.

"The problem for Australia, as markets fall, share markets, property values fall in China and its construction weakens off, that's weakening the demand for steel," he said.

"Australia's risk is that we sell the inputs that become Chinese steel, coking coal and the iron ore."

Richardson, speaking following the launch of the Access Economics quarterly business outlook, said spot steel prices were at US$1,200 a tonne in July, but had slumped to US$255 a tonne now.

That suggested a notable fall in prices was likely when Australian suppliers renegotiated contracts. Such a fall would not hurt growth rates as much as it would hurt income.

"Our problem is that at least some of that is about to unwind. We have already seen the weaker Australian dollar. I suspect that the next step is that as commodity prices fall, profits in Australia will fall, not just for the miners, but across a number of sectors," he said.

"Eventually, not straight away because it will take time, engineering and construction demand will weaken and this will hurt the federal budget."

(Xinhua News Agency October 24, 2008)