one could expect that the chinese authorities will have both the will and the capacity to respond, the more so now that inflation has moderated. china will have cycles like other economies, but it seems likely that the chinese economy will grow pretty strongly on average for a while yet. it will be a very large economy. even at the new growth target of 7½ per cent, a lower target than in the past five years ( all of which were, of course, exceeded ), chinese gdp will equal that of the united states, in purchasing power parity terms, in about a decade. it will exceed that of the euro area within the next few years. there are issues of rebalancing the sources of growth in asia, to which i shall return shortly. but the main point for now is that the global economy is faced at present with a year of subtrend growth in 2012, according to international forecasters. this is a subdued but not disastrous outcome. and asia in particular is well - placed to do fairly well, given sensible policies. downside risks certainly do remain, and are easier at this point to imagine than upside ones. at this point though they remain risks, rather than outcomes. what then about australia? at the moment, the viewpoints of those inside australia differ somewhat from those of people outside australia. viewed from abroad, judging by what people say, observers see an economy that experienced only a relatively mild downturn in 2008 – 2009, that made up the decline in output within a few months, and that has continued to expand, albeit at only moderate pace, since then. they see an economy that has not experienced a significant recession for 20 years, that has strong banks and little government debt – and that debt remains aaa - rated. some observers worry about high levels of housing prices and household debt. this is understandable given the problems that have occurred in some other countries. but then others point out that the arrears rate on mortgages, at 60 basis points, is quite low, and that the rate of new construction of dwellings in recent years has been low relative to population needs. bis central bankers ’ speeches foreign investors see a country that remains quite open to them, and that, reflecting its economic circumstances, offers rates of return that are high by international standards, even though they are low by australian historical standards. they understand the potential returns on the mineral and energy wealth stored in or around the australian continent, and that our terms of trade have over

it was at its peak in the 1990s. it ’ s worth noting that none of those additional net jobs came from manufacturing. 2 the manufacturing sector in fact shed about 100, 000 jobs over that 20 - year period. but other sectors increased their employment. mining employment tripled and that alone more than offsets the reduction in manufacturing, without taking into account the growth in construction, health care and a number of other services sectors where the number of jobs has roughly doubled. as of today, even with some recent weakness, there are more jobs in the economy than ever before. the second thing to say is that, cyclical things aside, the more likely problem in the mediumterm future won ’ t be one of not enough jobs, but instead, not enough workers. at present the number of new entrants to the labour force after finishing education each year exceeds the number retiring. ten years from now those numbers could be roughly equal, absent a further rise in labour participation in the older cohorts. the question will be less “ where will the jobs come from? ” and more “ where will the workers come from? ” it ’ s true that migration adds to the workforce as well, though migration also adds to the number of people not working and retiring. so demographic trends point in the direction of a smaller proportion of the population working, and a larger proportion needing support in their later years, even as other demands on the public finances for the provision of social goods increase. that looks like a pretty uncomfortable combination of trends. how do we reconcile them? the answer – the only answer – is growth. to some extent we will, hopefully, be able to lessen the problem through higher labour participation, for longer. but most of all we will need higher productivity of those working. that means making the system as flexible as possible and as encouraging as possible to innovation. that ’ s why the g20 agenda is very pertinent for australia, notwithstanding that we have enjoyed 20 years of reasonably steady growth. i dare say it is for the united states too. we are not just talking idly about other countries lifting their growth as an intellectual exercise. we are asking how to lift our own trend growth performance. for australia, one potential source of productivity improvement lies in the very fact that across a range of sectors the level of us productivity is much higher than our own. there may be various reasons for that, some of which we may be unable to emulate. but it ’