glenn stevens : overview of the australian economy and future challenges opening statement by mr glenn stevens, governor of the reserve bank of australia, to the house of representatives standing committee on economics, canberra, 26 november 2010. * * * when we last met with the committee in february this year, it was becoming clear that the recovery in the global economy was proceeding faster than many had expected. it was also clear that the strongest performance was in the emerging world, while recoveries in countries that had been at the centre of the financial events of 2007 and 2008 were relatively subdued. global financial markets had continued to improve, but were paying close attention to the rise in sovereign debt in a number of countries. at that time, people were talking about an expansion in global gdp of something like 4 per cent in 2010. as it turns out, it looks like the outcome will be stronger than that : current estimates for the year are about 4¾ per cent, which is above trend. the pattern of growth is still rather uneven. the additional strength has been concentrated in the emerging countries, with growth in china and india running at a pace of around 10 per cent in 2010. in contrast, growth of about 2½ per cent for the g7 group, after a contraction of around 3½ per cent in 2009, will leave a considerable margin of spare capacity and particularly of unemployed labour. financial markets and policymakers have maintained, and indeed increased, their focus on issues of sovereign debt sustainability. first greece, and now ireland have sought financial assistance from european partners and the imf, after a change in economic circumstances and a large rise in market borrowing costs left authorities with little other option, even with deep cuts to spending. across continental europe and the united kingdom, governments are embarking on a path of fiscal consolidation, in order to put public finances on a sounder footing in the face of increased obligations and reduced revenues. these programs will unavoidably have some short - term dampening effects on economic activity, which will likely become clearer during 2011. but the scope of alternative possibilities open to the governments concerned is really rather limited. in this environment it is no surprise that the major central banks are mostly maintaining very low interest rates and in some cases increasing the sizes of their already expanded balance sheets via asset purchases. these actions are designed to impart some further stimulus through reducing long - term interest rates even further or via effects on private - sector balance sheets. yet at the same time many other countries have moved to tighten

their monetary policies this year, in recognition of the robust recovery in output. in most cases in asia – japan being an exception – the rise in activity along the upward part of the “ v ” has now been seen and the pace of growth has to moderate if overheating is to be avoided. the combination of very low interest rates in the world ’ s developed financial centres, on the one hand, and strong growth and tightening monetary policies in asia and latin america, on the other, could be expected to place pressure on exchange rate regimes, and so it has proved. there have been substantial capital flows seeking the expected higher returns in emerging economies and a rise in asset values in many of the recipient countries. a number have responded with the imposition of capital controls and other measures to contain leverage, especially in housing markets. in this environment, where the policy imperatives differ so much across countries, the intensity of international discussion about exchange rates was bound to escalate, and it has done so, quite markedly. a year from now we will probably have observed some moderation in global growth, from this year ’ s above - trend pace to something closer to trend. that is the assumption we are making. the emerging world clearly needed some moderation, while the major countries working through the aftermath of banking crises are still likely, if history is any guide, to find it hard going for a while yet. how much progress we will have made in resolving the “ imbalances ” issue remains very unclear. but the strength of global growth thus far, and the particular pattern of growth in key emerging economies, with its very strong impact on demand for steel, has had a major effect on australia ’ s terms of trade. these have returned to, and in fact exceeded, the six - decade highs seen two years ago. it is our assumption that prices for key resource exports will not remain this high, but will instead decline over the next few years. even so, developments in the period since february have led us to lift our estimates for the terms of trade in the 2010 / 11 year. in february i suggested that real gdp growth in the australian economy would be a little over 3 per cent in 2010, and a little higher than that – about 3½ per cent – in 2011 and 2012. it would take only pretty moderate growth in the second half of the year to achieve that forecast for 2010. next year, growth could be stronger than we had expected nine months ago, though obviously there