in the opposite direction, perhaps concern about the weakness in export volumes or broader apprehension about the widening current account deficit itself. graph 2 graph 3 conclusion what do we make of all this? the big picture is, i think, that the world business cycle is still at an early stage of expansion, so we can expect continued economic growth over the next few years. this, together with our higher terms of trade and strong investment growth in the presence of some capacity constraints, is exerting an expansionary influence on domestic activity and upward pressure on inflation, mainly at the producer price level, although we also expect consumer price inflation to increase somewhat from its present rate. at the same time, the economy is at present being affected by some countervailing forces. consumption has slowed and house - building and farm output are falling ; these have exerted a moderating influence and may continue to do so. while there is a natural tendency to be disappointed that the second set of influences is now occurring, the fact is that the economy could not have taken on board the external situation without this moderation in the domestic economy. a failure to slow would most probably have produced the set of economic imbalances, particularly rising inflation, that have ended previous expansions. in this respect, the recent moderation in growth is more likely to prolong the expansion than bring it to an end.

##ing sector. strong employment growth is also underpinning the economic expansion. growth of 3½ per cent in domestic demand sounds reasonable, but growth in output, as measured by gdp of only 1. 9 per cent over the past year, sounds less satisfactory. what lies behind the lower output growth? the simplest factor to identify is the fall in farm output of 16 per cent. setting this aside, the growth in non - farm gdp is 2. 6 per cent over the past year. but the more interesting story concerns the balance of payments, so i will conclude by saying a few words about our external trade position. it is well - known that, despite the rise in world prices for our resource exports, australian exporters have struggled to increase export volumes over recent years. in large part, this is because of the size and speed of the rise in demand coupled with the very limited investment in capacity that has taken place in the late 1990s and early in this decade. this is a worldwide phenomenon ; it was because world producers were not able to increase supply to match the increase in demand that world commodity prices increased in the first place. a couple of port bottlenecks in australia also limited our supply response, but they are not the main part of the story. at the same time as export volumes remained weak, import volumes over recent years rose strongly. imports were boosted by the strong domestic demand, partly reflecting the increase in real income due to the terms of trade rise, and by the accompanying rise in the exchange rate. this latter factor, combined with the worldwide fall in the prices of manufactured goods, meant that import prices in australian dollars fell sharply until recently which encouraged import volumes to rise strongly. this is a normal process whereby a floating exchange rate relieves the pressure on domestic supply and inflation, but at some cost to the balance of payments. the good news is that it does not go on forever. in time, export volumes begin to rise again, as i believe they are now, and the slowing in domestic demand feeds through into slower import growth. while the rising exchange rate has been an important factor over the past couple of years, if we look at it over the past five years or so, it did not rise as much as would have been expected on the basis of its past relationship with the terms of trade ( graph 3 ). interest differentials in australia ’ s favour also pointed to a larger rise in the exchange rate. this suggests that some other factors must have been at work