of times recently, our central scenario is a relatively positive one. the economies in asia are expected to continue growing reasonably solidly, while the advanced economies are expected to have only a subdued recovery, weighed down by the need to consolidate balance sheets in both the household and public sectors. around this central scenario there are, however, clearly risks, particularly associated with the three issues that i have just touched on. given these risks, one question is how should policy be set? the reserve bank ’ s general approach has been to proceed on the basis of the central scenario, but be prepared to respond if things turn out differently, as we did in late 2008 when the global outlook took a marked turn for the worse. the alternative of waiting to see how the myriad of risks evolves before adjusting policy runs the significant downside of moving too late, particularly given that the economy is starting this upswing with less spare capacity than in previous upswings. fortunately, in australia we have had the policy flexibility to respond to changing events as they have occurred and this has served us well. the australian economy i would now like to turn more specifically to the australian economy, where the run of data over the past few months has tended to be on the firm side. employment growth has been robust, business and consumer confidence is above average, the housing market has been strong, and there are signs that the period of business deleveraging is coming to an end ( graph 7 ). collectively, these outcomes provide us with some confidence that the economy is now in a reasonably solid upswing. graph 7 unemployment and business confidence % % unemployment rate % % business confidence * - 15 - 15 - 30 - 30 - 45 - 45 * net balance ; deviation from long - run average sources : abs ; nab ; rba over the course of this year, the nature of this upswing is, however, likely to change somewhat. recently, the overall level of spending in australia has been supported by strong growth in public - sector demand. this has occurred at a time when growth in private - sector demand has been relatively weak ( graph 8 ). as we move into the second half of 2010, this configuration is likely to change. public - sector investment is projected to decline, particularly as spending on the federal government ’ s school building program tails off. but moving in the other direction, private - sector business investment is expected to strengthen further, particularly in the resources sector. graph 8 domestic final demand growth * financial years %

guy debelle : on risk and uncertainty address by mr guy debelle, assistant governor of the reserve bank of australia, at the risk australia conference, sydney, 31 august 2010. * * * “ the future ’ s uncertain and the end is always near ” – jim morrison today i want to talk about the role of risk and uncertainty in the financial crisis. the primary reason why i want to do that is that i believe risk assessment, or more precisely, misassessment has been one of the key elements of the crisis. while that is undoubtedly true in any crisis, i think it has played a more central role in the current episode than in the past. risk was mis - assessed by financial institutions, risk managers, investors and regulators. there was a false comfort taken from a misplaced belief that risk was being accurately and appropriately measured. to some extent, the technology provided risk managers with a false sense of security. risk may well have been accurately measured for the particular regime that the economy and financial markets were operating in. but the risk assessment was not robust to a regime change that took the models out of their historical comfort zone. not enough account was taken of uncertainty. one of the messages i want to leave you with is that risk measurement based on historical models can only take you so far. judgement must play an important role. ultimately, the future is uncertain, in the sense that it cannot be quantified. the goal should be to design systems that are as robust as possible to this uncertainty. a system with less leverage is one obvious means of enhancing robustness. risk versus uncertainty in discussing risk, i would like to highlight the key distinction between risk and uncertainty : risk is quantifiable, uncertainty is not. this is a distinction with a long tradition. keynes made much of it, 1 as did frank knight who lends his name to “ knightian ” uncertainty, on which he elaborated in risk, uncertainty and profit in 1921. 2 knightian uncertainty arises when you don ’ t know the underlying probability distribution, which makes quantifying the risks impossible. more recently, this distinction has been given prominence by donald rumsfeld with his knowns and unknowns, as well as by satyajit das in traders, guns and money and nassim taleb in the black swan. in addition to the distinction between risk and uncertainty in terms of measurability, keynes made the similar distinction between cardinal and ordinal probability. indeed his treatise on