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, 19 february 2010. * * * since we last met the global economy has continued an expansion that started around the middle of 2009. it appears that world gdp grew at an annualised pace of about 4 per cent in the second half of last year. many forecasters now expect a similar result in 2010. international financial markets have generally continued to thaw, with most capital markets functioning again and the use by banks of exceptional support from central banks and government guarantees being wound down. these are, needless to say, very welcome developments. having said that, the situation is not without some challenges. i will mention just two. the first is the two - speed nature of the global recovery. normally after a sharp downturn, the ensuing upswing is correspondingly strong. this has been the case among a number of asia - pacific economies, which take half of australia ’ s exports. the strength is not confined to china : india, korea, singapore, taiwan and others have all seen a significant pick - up in production and trade. in several of these instances the term “ v - shaped recovery ” would be apt. around the region, secularly rising incomes, generally healthy banking systems and relatively low public debt levels allow considerable room for confidence of a sustained expansion in demand. in fact in some cases the issue of overheating is arising and the authorities in both china and india have begun to tighten their policy settings. in the large industrial countries, on the other hand, the rebound has been more tentative, and driven more by the turn in the inventory cycle and temporary policy measures than a strong pick - up in private demand. it is not unusual, at this point of the recovery, for the inventory dynamics to be playing a prominent role in pushing up output. nonetheless, the question is the extent to which a durable upswing in private final demand in the various countries will become established. most observers expect this to be a fairly gradual process, given the lingering effect of the strain on banking systems and ongoing de - leveraging, not to mention the need, at some point, to begin the process of fiscal consolidation. growth in these cases is therefore expected to remain modest and, as a result, these economies are likely to be characterised by a lot of spare capacity and ongoing high unemployment. so the historic shift

monetary policy. having said that, the mid - march package is providing material help now and it will continue to do so. interest rates are lower than they have ever been before and the financial system is flush with liquidity. also helping is the fact that the australian financial system is in good shape. we went into the pandemic with strong balance sheets and high levels of capital in the australian banking system. this means that our financial institutions are well placed to provide the credit that the economy will need. one monetary policy option that has been the subject of public discussion over recent months is the possibility of the rba creating money to directly finance government spending. for some, this offers the possibility of a ‘ free lunch ’. the reality, though, is that there is no free lunch. there is no magic pudding. there is no way of putting aside the government ’ s budget constraint permanently. as i spoke about in a talk last month, it is certainly possible for a central bank to use monetary financing to affect when and how government spending is paid for. depending upon how things are managed, it can be paid for through the inflation tax, by implicit taxes on the banking system and / or higher general taxes in the future. but it does have to be paid for at some point. 3 / 5 bis central bankers'speeches i want to make it clear that monetary financing of the budget is not on the agenda in australia. the separation of monetary policy and fiscal financing is part of australia ’ s strong institutional framework and has served the country well. the australian government and the states and territories have ready access to the capital markets and they can borrow at historically low rates of interest. at a more practical level, i would like to mention a couple of other areas where the rba has been providing assistance with australia ’ s covid - 19 response. the first is as transactional banker for the australian government. over recent months the rba ’ s banking systems have been used to make record numbers of payments, processing the government ’ s income support to households and businesses. we have done this with around 90 per cent of our staff working from home and it has been a great effort by the rba ’ s banking and payments teams. the second is meeting the increased demand for banknotes. while covid - 19 has accelerated the shift to electronic payments, there has, paradoxically, also been record demand for banknotes. some people seem to be wanting to keep some extra money at home. the