, both in absolute terms and, more particularly, relative to how things might have turned out. i would like to illustrate this latter point by referring back to a framework i put before the committee a year ago when we met in melbourne. this contained four possible scenarios, which i will recap. the first was : “ a weakening world outlook and an abating of domestic credit and asset market pressures. this would provide a reasonably clear prognosis for monetary policy. in other words, if it were weak internationally, and weak domestically, that would be easy. in the other direction, so too would a combination of a clear strengthening of the world economy and continued domestic buoyancy. that would be easy. a third possible combination, and the most favourable one for australia, would be a firming world economy and an easing in domestic pressures, resulting in more balanced growth for the australian economy. but the combination that would be most damaging to the australian economy would be if the household sector were to continue putting itself into a more exposed position at the rate it has over the past few years while, at the same time, a further weakening of the world economy was starting to feed through to australian activity and incomes. ” the last - mentioned of these possible outcomes, and the most unfavourable, was a distinct possibility in the middle of last year, but fortunately it did not come to pass. what occurred instead in the second half of last year was the second - mentioned possibility - a strengthening world economy and a continuation of domestic credit and asset market pressures centred on housing. this was the environment in which we decided twice to raise the cash rate. what has happened so far this year - although it took some time to clearly identify it - was the third - mentioned possibility - a transition to a set of conditions in line with a firming in the world economy and an easing in domestic pressures. this was the most favourable outcome and the one most likely to result in a more balanced growth for the australian economy. i outlined this in a speech i gave to macquarie university in april and we spelled it out more fully in our quarterly statement on monetary policy published last month. the fact that conditions began to develop along these lines is also the reason why, after two rate rises in late 2003, we have not seen the need for action on monetary policy in any of our board meetings this year. in short, we have been comfortable with developments - a lot more so than we were for most of last year.

an exceptionally strong pace, but the external sector was subtracting from growth. inflation at this time was also above 3 per cent. even so, we did not use monetary policy to rein in the rapid growth of domestic demand because, for the economy as a whole, growth was not excessive and was not threatening our inflation objective over the medium term, despite being above it in the short run. while monetary policy is directed at the economy as a whole, it does not mean that we have to direct an equal amount of attention to each of its components. those parts that are obviously exhibiting a serious imbalance will attract more of our attention than those that are relatively well behaved. this explains why we have spent so much time talking about, and researching, the excessively rapid growth in housing credit and, until recently, house prices. while other economic variables were more important for the overall macro - economic outlook, for example consumption and wage growth, their behaviour was not as clearly aberrant and therefore not in need of such intensive study. the forecast for gdp growth in 2004 that i presented before is based on the view that domestic demand will slow from its former rapid pace, but at the same time the subtraction from growth due to the external sector will gradually diminish. consumption has recently slowed a bit, although it continues to be supported by strong employment growth and will benefit from the tax cuts later in the year. business fixed investment, particularly in building and structures, will add to growth but not to the same extent as in recent years. residential investment is expected to subtract from growth and government spending will add to it. overall, expected gdp growth of 3¾ per cent would be a good outcome. at this stage, we are not assuming a significant drought effect over the coming twelve months, but this remains a downward risk, given the dry conditions prevailing in some parts of the country so far this year. on the inflation front, we do not see a problem over the next twelve months. beyond that, the picture is of necessity more difficult to quantify. last time we met we were slightly troubled by the fact that inflation in the non - traded sector was over 4 per cent, and that if this continued it might imply a medium - term outlook for inflation somewhat above 3 per cent. this is still a risk, but we have taken some comfort from the fact that some of the sectors that were pushing it up - such as house - building and property services - should slow as