households is : where are we heading over the coming five years? i think it is now widely accepted that growth in real incomes over the next year or two will be more subdued than over the past five years. how subdued will depend importantly on the effects of the financial turmoil. nobody knows how significant they will turn out to be but it would be reasonable to assume that income growth for the household sector will be noticeably below average over the next year or two. beyond the next couple of years, the future is harder to predict, but there is no reason at this stage to doubt that past patterns will be repeated and that growth will pick up again. australia remains, after all, a very dynamic economy. the outcomes in australia will, as usual, be influenced to some degree by global developments. at present, the major developed economies seem to be moving into recession, as they tend to do every seven to ten years. the last such recession was in 2001, so the one that is emerging at present seems to be pretty much on cue. the bank has been factoring weaker global economic growth into its policy assessment for much of this year. throughout this period, we have been forecasting lower growth than the major international forecasters. even so, the events of the past couple of months have caused us to revise our forecasts down further. australia managed to sidestep the 2001 global recession. can it do that again? that is certainly what we are aiming for, and there is nothing in the data to date to suggest that we are off track. but the economy is being affected by powerful forces from different directions, and it is unclear what the net effect will be. the impact of global developments is particularly uncertain. we also have to recognise that the task of managing the economy this time will be more difficult than in 2001 because we are starting with a bigger inflation overhang. the bank has for some time thought that inflation would peak in the second half of 2008 and then fall ; accordingly, we have acted pre - emptively in reducing interest rates. nonetheless, there is still a big task ahead to bring inflation down and this could limit room for manoeuvre on monetary policy. many people will be disappointed and unhappy with a year or two of below - average economic performance. but the truth is that the economy cannot always grow above average and it certainly cannot maintain the pace of the past five years. if we attempted to make it do so, we would be repeating the mistakes of our

work than last year. the employment ratio has risen from 72 % to 74 % of the working - age population. the great challenge for economic policy and for the social partners on the labour market is to continue to act responsibly so that the period of good growth that our country is experiencing is not interrupted prematurely. in this way, the period of growth can probably be extended for several years and the employment ratio can also increase markedly then. difficult balance to strike for monetary policy the riksbank must strike a balance in monetary policy so that growth is not dampened unnecessarily but neither becomes so strong that inflation accelerates. the difficulties lie in foreseeing the growth of demand and its relation to inflation over a period of a couple of years to come. a change in interest rates actually has an effect with a considerable time lag, its full impact only being felt after a couple of years. if changes in interest rates come too late, the consequences will be unnecessarily large fluctuations in growth. however, experience shows that if inflation is allowed to rise, there is a great risk that the higher inflation will persist and that inflation expectations will be driven up. the consequence of the riksbank ’ s “ wait - and - see ” standpoint would therefore be to imperil the credibility that has been laboriously achieved - or even lose it. considerably greater restraint would then be required than if inflation had been stopped in time. in order to avoid this, the riksbank may need to increase interest rates before registered inflation shows signs of increasing, which will confront us with an educational problem. if the riksbank wishes to safeguard growth, employment, and a high use of resources in other respects, monetary policy must be adapted in time. low inflation expectations however, as has been said, it is also important not to increase interest rates too early and thus dampen growth unnecessarily. a difficult question that the riksbank must take a position on in its assessment of inflationary pressure is whether the relationship between growth and inflation has changed and, in this case, which factors have contributed to this. a concept that has been frequently discussed during the past year is the “ new economy ”. discussion has above all centred on the american economy, which now seems to be at the end of a long period of high growth. it seems as if the usa has skipped an entire business cycle. this was in fact also the case in the 1980s.