, that only lifts production to the level of demand, which remains lower than it was before. an ongoing rise in output will depend on demand starting to increase. again, the clearest indication of stronger demand is in some of the emerging economies, particularly china. the improvement in china ’ s growth does not seem to be coming from chinese exports to the developed world, but from stronger demand at home. the reversal of earlier restrictive policies designed to slow the chinese economy because of inflation concerns, together with a government spending package that by any standards has been very large, have both contributed. to date, the recovery has been led by increased spending on infrastructure. what is not yet clear is the extent to which chinese private - sector demand is accelerating. a pick - up in china is relatively beneficial to australia, as i will discuss in a moment. for the world economy, it will also be beneficial if the emerging world relies more on domestic demand for growth than it has in the past decade. a durable expansion will be one that is more balanced than the last one. that said, prospects for demand in the developed world obviously remain very important because of the still very large size of those economies. most observers expect that demand in the united states and europe ( including the united kingdom ) will be quite subdued for a few years. one might, of course, ask whether the striking speed and simultaneity of the downturn could be seen again in the upswing. the reason people think such an outcome is unlikely is that the loss of wealth during 2008 and the need for private - sector balance sheets to be deleveraged are thought likely to constrain both household demand and the ability of the banking sector to expand credit, for some time. this is a reasonable reading of the history of most financial crises, and underpins the consensus forecast that global growth, when it resumes, will be pretty modest initially. yet the speed and size of the responses to the downturn by policy - makers around the world is just as unprecedented as the speed and size of the downturn itself. if there were an upside surprise on global growth, it would most likely be because the collective effects of all those policy responses turned out to be bigger than expected, perhaps because those expectations were formed by looking at a history where such simultaneous responses rarely occurred. having said that, the size of the build - up in government debt in some of the major economies will surely become much more of a constraint on their fiscal room for man

coal market, australia ’ s exports have traditionally gone to japan, korea and taiwan, where demand has softened. but increased demand in china ( which traditionally imported very little coal ) has partly offset the falls elsewhere. indeed, in the past year, china ’ s share of australia ’ s merchandise exports has risen sharply, and is approaching that of japan ( graph 3 ). part of the increased demand from china can be explained by the construction - intensive activity taking place there, and part by reduced chinese production of iron ore and coal, as the fall in prices has seen some of the high - cost mines in china being closed. for both iron ore and coal, australian companies are among the lowest - cost producers and so gain when higher - cost firms exit the scene. factors such as this have kept australian exports doing relatively well so far, and would seem to offer significant long - term opportunities, including for this region. graph 3 the australian economy has, nonetheless, been affected by the global recession, with real gdp, on the latest estimates, posting a small net decline over the past couple of quarters. the major driver of the slowdown has been weaker private domestic demand, most prominently a sharp decline in business investment spending, with a fall off in housing construction. the fall in investment is best seen as the same understandable precautionary behaviour by australian businesses as displayed by their counterparts around the world. a decline in business investment spending of about 8 to 10 per cent in the december quarter seems to have been a pretty standard result around the world. macroeconomic policies have not been able to prevent an economic downturn. they rarely can, especially in the face of a global recession of this magnitude. indeed, attempts to do so have as often as not run into trouble by stoking up bigger problems a few years down the track. but it is reasonable to think that policies can have the effect of making the downturn shallower than would otherwise have been the case, and that they can help to establish conditions conducive to recovery. the scope to implement such policy changes has to be earned during the expansion phase of the cycle. but australia did earn that scope, and has been prepared to use it during the last six months. what has the reserve bank been doing? the bank made a number of changes to its operations in financial markets to help keep them functioning through the worst of the crisis. measures the government took in this sphere were also important for confidence and access to funding. the