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

the norwegian business sector, the depreciation of the krone contributed to curbing the decline in activity and employment. there is nevertheless uncertainty as to the magnitude of the impact of short - term exchange rate fluctuations because companies engage in currency hedging. there are different ways to hedge against currency fluctuations. some enterprises buy intermediate goods in the same currency in which they sell their products. other companies raise a loan in the same currency as that of the company ’ s assets. in addition, companies can hedge against currency swings in the forward exchange market and options market. the large volume of international trade in currency derivatives, which is dominated by banks reduces, premiums and costs for other business sectors and thereby promote cross - border trade in goods and services. it is not a good idea to throw a spanner into the works. the impact on household consumption and housing investment has been substantial. business investment is now picking up. in norway, household debt is higher than household deposits. the decline in interest rates has thereby freed up funds. households reacted relatively rapidly, and growth in consumption picked up. the fall in interest rates pushed up house prices. turnover in the housing market has been high. higher housing wealth provides increased borrowing opportunities and thereby also boosts demand for consumer durables. household debt has risen by around 11 per cent over the past year. high resale home prices have made it more profitable to build new homes, and residential construction is rising. the fall in interest rates has also contributed to sustaining the market value of office premises and commercial property even with a high vacancy rate. with the prospect of higher occupancy rates, prices are now rising. owing to higher productivity and a drop in sickness absence, it may have taken time for the effects to become visible in the labour market. however, higher demand for labour and falling unemployment is gradually leading to a tighter labour market. high interest rates in 2002 and fiscal discipline contributed to a deceleration in wage growth to a more sustainable level. higher demand for companies ’ goods provides scope for increasing prices. experience shows that inflation is directly influenced by the level of capacity utilisation in the norwegian economy. some of the rise in prices for domestically produced goods and services can be attributed to higher margins in the business sector. if there is confidence in monetary policy, economic agents will expect inflation to be close to target over time. this will provide a basis for company budgets. this will then contribute to stabilising inflation. many companies change their prices