Swan warns of looming slump if Europe falters

TREASURER Wayne Swan said the economy could fall into a slump on par with the downturn Australia suffered during the global financial crisis if Europe's cascading debt crisis was not resolved.

In a call for world leaders to act quickly to resurrect global growth, Mr Swan also conceded Australia's budget could be threatened by events overseas.

Ahead of meetings with G20 finance ministers this weekend, Mr Swan said much more needed to be done to resolve market volatility and put the world economy ''back on track''.

''If the worst fears for Europe are realised this time, the impacts on our own economy could be just as severe as those in 2008,'' he said in Parliament. ''That's why international engagement is just as important now as it was at the height of the global financial crisis.''

While Australia's economy had bright growth prospects and was creating jobs, he warned that prolonged volatility on global markets could stymie the domestic economy by dragging on confidence.

The government has pledged to hand down a narrow surplus in 2012-13, but Mr Swan conceded the budget would be affected by a severe global slump.

''Despite our fundamental strengths, we know that the Australian economy and our budget will not remain untouched from global instability,'' Mr Swan said.

In 2009, the government moved to head off the effects of the crisis with a $42 billion stimulus package, but such a response would be politically difficult now.

Direct fallout from Europe's debt crisis has so far been contained to the sharemarket, hitting superannuation balances.

The prices of Australia's lucrative mining exports have remained healthy, avoiding the falls of 20 per cent seen in other resources such as base metals.

''Coal and iron ore prices - the commodity prices most important to the Australian economy - are holding up relatively well to date, but remain vulnerable to any sharp slump in global demand,'' Mr Swan said.

To address the global challenges, Mr Swan called on European nations to restore the health of their budgets, saying more than the ?440 billion ($A600 billion) bailout package was needed.

''Developed countries - in particular in Europe - need to put their budgets on a sustainable footing, while supporting growth where possible,'' he said.

''Europe needs to regain the confidence of markets in its capacity to meet its debt obligations.''

Mr Swan also pledged to put pressure on China to move away from its policy of holding down its currency, which placed other nations' exporters at a disadvantage.

The comments came as new figures showed consumer confidence had edged up amid growing expectations the Reserve Bank may cut interest rates on Melbourne Cup day.