Australia ranked third on the 2012 Index of Economic Freedom released on Friday by U.S. think tank Heritage Foundation. Hong Kong topped the list, followed by Singapore.

After Australia, rounding up the top 10 are New Zealand, Switzerland, Canada, Chile, Mauritius, Ireland and the United States. On the opposite end, the least economically free nation was North Korea, followed by Zimbabwe, Cuba, Libya and Eritrea.

The index is a measure of economic freedom among 179 nations, which the foundation prepares in partnership with The Wall Street Journal. The foundation's basis was on 10 specific categories, namely: labor freedom, business freedom, trade freedom, fiscal freedom, government spending, monetary freedom, investment freedom, financial freedom, property rights and freedom from corruption. The overall score of a country was based on average scores in each category.

Australia placed third based on its 83.1 index points, up by 0.6 points from its 2011 score. Acting Australian Treasurer Bill Shorten said despite the high ranking of the country in the index, the government could not afford to be complacent.

The release of the index came at about the same time that U.S. bank JP Morgan warned that the Australian economy could be vulnerable to recession in 2012 with the worsening of the European sovereign debt crisis.

JP Morgan chief economist Stephen Walters explained that since the 2008 global financial crisis did not affect Australia meant the country did not undergo adjustments that other affected western economies went through which makes Australia still vulnerable to shocks.

"Consumers have a large buffer of savings but have hardly de-levered at all. House prices, having fallen only modestly remain high relative to household income, and Australia trade is tied more than ever to the fortunes of China, which now takes one quarter of Australia's exports," The Australian quoted Mr Walters.

The report stressed that Australia has less policy flexibility compared to a few years ago because the government had put on a fiscal straightjacket by promising a budget surplus in the next fiscal year which it is bound to fulfill that promise.

HSBC chief economist Paul Bloxham, in a separate report, added that Australia is at a risk of missing the surplus target if global economic growth further weakens.

On Friday, rating agency Standard & Poor's stripped France and Austria of their triple A ratings and downgraded seven more European Nations.

However, Mr Shorten debunked JP Morgan's warning of a recession.

"We've got strong growth, low inflation, contained unemployment and very low debt," The Australian quoted Mr Shorten.

"By global comparison, Australia walks tall because of the relative strength of our economy under the Gillard government's strong economic management," he added.

In the 2008 global financial crisis, Australia did not suffer from a recession but it logged a quarter of economic contraction during the fourth quarter of 2008. Although the Australian economy is generally strong, particularly its resources sector, the country is marked by a two-speed economy and other sectors such as retail show a slowdown.

Mr Shorten pointed out that to address the patchwork pressures on the Australian economy, the Gillard government is investing heavily in skills, infrastructure and productivity.

This is complemented by $114 billion worth of infrastructure projects in the pipeline in the resources and mining sectors, making Australia the fastest-growing construction market globally.

To ensure that Australian states comply with national reforms initiated by the federal government to balance the economy, Mr Shorten warned state governments that their $450 million reward payments from the Commonwealth could be withheld if it does not pursue the changes.

Mr Shorten particularly identified Victoria and Western Australia as stalling reforms on uniform occupational health and safety laws. The reforms aim to develop a mobile labour force in which workers' skills would be recognised throughout Australia.

The operation of eight separate systems for occupation health and safety regulations throughout the country costs Australian businesses $43 million weekly, Mr Shorten disclosed.

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