of our export to import prices. currently australia is benefiting from the largest cumulative increase in our terms of trade since the early 1970s. the main factor driving this has been the rapid growth in global demand for resources, with china in particular contributing strongly. as a result, world prices for a wide range of resource commodities have been increasing sharply. over the past three years australia's terms of trade have increased by around 30 per cent. this is estimated to have added 1½ – 2 percentage points per annum to the growth in national income over this period, a significant expansionary force for the economy as a whole. the economic effects can be seen in a number of areas including strong growth in business investment, company profits, share prices and imports. increased export prices also tend to boost government revenues through company taxes and a range of federal and state royalties. interest rates and financial markets although australia avoided the recession that engulfed many developed countries at the start of this decade, it was not totally unaffected by world events, and the bank found it necessary in 2001 to cut the cash rate to 4. 25 per cent in a series of steps. while that was a new low for australian official interest rates – the previous low had been 4. 75 per cent in the late 1990s – it was a relatively muted response compared with the very large cuts in interest rates that occurred elsewhere in the world. in mid 2002, with both domestic and global economic conditions improving, the bank began the process of restoring official interest rates to more normal levels. it did this in five steps over three years – two in mid 2002, two in late 2003 and one in early 2005 – a more gradual tightening cycle than normal. at the current level of 5. 5 per cent, the cash rate is in line with its average over the low inflation period since 1993. there is therefore a sense that the current level is relatively neutral in terms of its impact on economic activity and inflation. one complication in assessing the level of interest rates, however, is that competition in the financial sector has seen margins between the cash rate and institutions'lending rates narrow over recent years, so the interest rates faced by borrowers are still a little below average. australia moved to restore normal interest rates well ahead of other developed economies. all the major countries had reduced interest rates to unprecedented levels in the early part of this decade – 0 per cent in japan, 1 per cent in the united states and 2 per cent in the euro area – and they maintained this position for

move together, at least among countries in the developed world. that is, there has been a reasonably high correlation in the timing of recessions and expansions among developed countries over the past few decades. most of the advanced countries experienced recessions in the mid 1970s, the early 1980s and the early 1990s, and many did so in 2001. it is relatively unusual for countries in this group to experience what might be termed a'home - grown'recession, that is, a recession not shared by the major industrial countries. similarly, it is fairly unusual for countries to skip an international recession, though australia and some other countries have recently done so, as did japan in the early 1980s. this is not to say that domestic conditions and policies are unimportant. nevertheless, as a general rule, when the world economy as a whole is in a sustained expansion, there is a good chance that an expansion will also be continuing in an economy such as australia. currently the world economy is expanding strongly. the recovery from the global downturn in 2001 is now well established and, on past experience, the expansion should still have some way to run. while growth to date has been led mainly by the united states and china, there have been encouraging signs over the past year that growth is becoming very broadly based, with conditions improving in japan as well as in a number of other economies. assessments of the risks to the global growth outlook have focused mainly on the effects of higher oil prices and on the possibility that the us current account imbalance will have a disruptive effect on the world economy. however, there is little sign that these forces are restricting growth at present. world gdp growth in 2005 is estimated to have been above average, and most observers expect this to continue in 2006. this growth performance has been accompanied by generally subdued inflation outcomes. one factor behind this was the increased focus on inflation control by central banks around the world, after the high inflation of the 1970s and 1980s. many central banks have now adopted numerical inflation targets and others have clearly become more focused on inflation control even without adopting explicit targets. at the same time, the importance of structural factors, and particularly the industrialisation of china, should be recognised. the huge pool of low - cost labour that this has brought into play has put sustained downward pressure on a wide range of prices of internationally traded goods. the terms of trade one consequence of these developments has been a marked upswing in australia's terms of trade, defined as the ratio