Another block has been laid in the construction of Asia's economic powerhouse, with steps to free trade between Australia and Thailand.

The two countries have agreed to start talks on a rolling programme of breaking down barriers to commerce.

The proposal, covering commerce between the nations currently estimated at $3.4bn a year, could end up as Thailand's first bilateral trade deal.

Australia has a longstanding agreement with New Zealand, with a deal with Singapore set to be finalised in October, and moves afoot to boost "co-operation" with Vietnam.

The announcement also progresses moves towards liberalising commerce in the Asia-Pacific region, which accounts for almost half of world trade and output.

Since the collapse three years ago of trade talks mediated by the World Trade Organisation, Asia-Pacific nations have begun negotiating smaller, bilateral pacts, taking a different approach to building a free trade area than that adopted in the US and Europe.

Problem areas

Australian Prime Minister John Howard stressed that progress on free trade with Thailand would be achieved only incrementally.

"As we reach agreement in individual sectors then we will announce that agreement," Mr Howard said.

"We won't wait until every single thing that's on the table has either been agreed or pushed right off."

Deals for some markets would prove difficult, he admitted.

"It should be recognised that in some areas we will not reach agreement."

Key study

Thailand's Prime Minister Thaksin Shinawatra nonetheless restated the importance of the talks.

"If we can increase trade among two countries it means you will have more investment, more employment, more economic activities in each country," he said.

Thailand is Australia's 14th largest trading partner, buying in particular dairy products, pharmaceuticals and large cars.

Thursday's announcement follows a study which estimated that a free trade agreement would boost Thai economic output by 46bn Australian dollars over 20 years, and Australia's by 12bn Australian dollars.

High Street boom

Separate data released on Thursday showed that Australia is, in line with many other industrialised nations, seeing a boom in consumer spending.

High Street turnover rose by 0.9% last month, twice the rise analysts had expected.

But spending by businesses on buildings, plants and equipment was weak, down 3.2% to just under 10bn Australian dollars.

Australia's central bank, which earlier this month raised interest rates for the first time in almost two years, will on Wednesday announce its latest rate decision.