export volumes ran to about 2 percentage points in the year to june 2001, but was negative during the second half of 2001. so two questions can be posed. first, why is it that on this occasion, so far at least, we have done better than on others? and second, will it continue? a lot has been made of the housing upswing which is currently increasing activity and employment in the construction sector and associated parts of manufacturing. it is true that this is helping growth at present, and that it will most likely fade from the middle of the year. but of course it is equally true that we " paid for " this boost with a large contraction – of unprecedented size, in fact – during the second half of 2000. we took a brief but very large housing downturn at a time when the world economy was still doing acceptably well, and then got the benefit of an upswing in housing as the world slowed. the timing of this was not, of course, something over which we had any control. looking through the ups and downs of the housing sector, it is still the case that the australian economy has performed better than in other episodes of global recession. this is not to deny that growth has declined – in some underlying sense, stripping out the housing fluctuations, growth might have run at something like 2½ per cent over each of 2000 and 2001. that is noticeably slower than the outcomes for 1998 and 1999 ( which were exceptional ). but it is still a better performance than those in the us and most other major countries, and better than an extrapolation of historical experience in previous global downturns might have suggested. we should also, of course, keep in mind that the full effects of the global downturn on australia are probably not yet apparent. even so, as we begin to get the very early pieces of economic information for 2002, it seems that business and consumer confidence has held up quite well, and there are some signs of improvement in demand for labour. all this is consistent with growth continuing thus far. so the question remains as to why that has occurred. one major factor which has helped has been that few of the problems which have dogged us in past episodes, and hence exacerbated business cycle downturns, have been present on this occasion. the obvious one which a central banker would nominate is inflation, which has increased, but not beyond manageable levels. core inflation picked up from about 1½ per cent in 1998 and 1999

of toxic products that were central to the crisis. in general, our banking system has not suffered the same excesses that i have described. that is not so say that everyone trusts their bank, and there are some who, because of the actions of banks seen abroad, tar all banks with the same brush. there are also, no doubt, many people who can tell you stories about their negative experiences with their banks. but in general the conduct of our banks and financial system over the past few years has been very different to that in a number of the advanced economies. however, we cannot be complacent and for this reason there is ongoing work to strengthen the regulatory architecture with the move toward a twin peaks model of financial regulation. this approach will see the consolidation of all prudential regulation of financial institutions within the bank, while market conduct regulation of the financial sector will be consolidated within the financial services board. in conclusion, it is important that banks around the world try to regain the trust of ordinary people. the lack of trust is epitomised in a recent article by financial times columnist john gapper who notes that “ if regrets, apologies and promises to behave better were redeemable for cash, the world ’ s banks would be rolling in it … but what are the odds of these noble promises enduring past the usual period of sackcloth and ashes at the bottom of the banking cycle? not very high, i ’ m afraid. although the new generation of bank leaders probably has good intentions – as well as needing to assuage public outrage – these pledges will be difficult to enforce, or even recall, when it matters. ” the banks have a lot of work to do to change the culture that has crept into the sector. fortunately our banking sector does not appear to have been prone to the same excesses, although they are by no means perfect. as i have outlined, it is critical for a growing economy to have a vibrant, stable banking sector, and given the importance of this sector it is imperative that it be appropriately regulated and supervised. given their important role in the economy, banks have a particular responsibility to act is such a way that engenders trust. i have focused on the issue of trust in the banking sector. but the issue of trust must permeate society in general. if we want to nurture a stable democracy, we need to behave in ways that will create trust in our political, social and economic institutions, and between social groups