the first reason for the slowing in domestic demand is the change that has occurred in the housing sector. fuelled by a rapid increase in mortgage lending, house prices rose sharply and house - building activity surged in the first few years of this decade. over the past year, however, we have had a turnaround in all three ; house prices have flattened, mortgage lending has slowed and house - building has contracted modestly ( graph 2 ). the direct effect of the last - mentioned is the easiest to measure ; this figure is the difference between the growth rates of real gdp and real gross domestic income for the two years to the march quarter 2005. house - building grew by 11. 1 per cent last financial year and has contracted by 5. 3 per cent so far this year. this means it added 0. 7 per cent to the growth of demand last year and has taken 0. 3 per cent off this year. note, however, that as a per cent of gdp, housing is still high by historical standards. a second reason for the slowing in domestic demand may be the indirect effects of the change in the housing market. these are harder to measure, but there is some evidence that the flattening of house prices has led households to tighten their belts. growth in borrowing against housing has slowed to an annualised rate of 10 per cent in the first four months of 2005. while this is well down from a year ago, it is still faster than the growth in household incomes. after several years when borrowing was much higher than housing investment as households withdrew equity to fund consumption, it appears that housing equity withdrawal has now ceased. in line with this, growth in consumption has slowed from 5. 9 per cent in 2003 / 04 to an annual rate of 3. 4 per cent so far this year. in other words, while households have stopped adding to their consumption by borrowing against the equity in their houses, there has not been a major scaling back in order to build up savings. it is hard to know whether this household consolidation will continue, for how long it will last, or whether it will intensify. it is early times yet and the situation bears close watching. as a result of these two influences - the slowing in consumption and the fall in house - building domestic demand growth has fallen from just over 6 per cent to about 3½ per cent so far this financial year. business investment continues to grow strongly, which is important given our need to increase capacity, particularly in the export

glenn stevens : overview of the australian economy and challenges ahead opening statement by mr glenn stevens, governor of the reserve bank of australia, to the house of representatives standing committee on economics, canberra, 11 february 2011. * * * in the relatively short period since we last met, the global economy has continued to expand and, if anything, looks a little stronger than it did. china and india have sustained a strong pace of expansion and the united states seems to be gaining a bit more momentum lately though it still faces considerable problems. conditions in europe remain quite mixed and the interplay of sovereign and bank creditworthiness continues to be a source of great uncertainty. observers have been revising up both their estimates of global growth outcomes for 2010 and their forecasts of growth in 2011. the imf is now saying world gdp growth was about 5 per cent in 2010, which is well above the 30 - year average. for 2011 the imf has lifted its forecast to 4. 4 per cent, which is still noticeably above average. global commodity prices have risen further in recent months. this has been quite widespread – from metals, to minerals, to energy and foodstuffs. in a number of countries, measures of consumer price inflation have reflected this rise in commodity prices, particularly in the case of food. china, india, indeed most of asia, and latin america are all facing these issues. managing these pressures is shaping up as one of the major international economic policy challenges of 2011. the commodity prices most important for australia are at very high levels. in the case of coal, this reflects in part the supply tightness resulting from the queensland floods, which have reduced national production by something like 15 per cent and had a material effect on the global supply of traded coal. but supply of iron ore has not been much affected by the weather and its price has risen above the highs of 2008, driven by strong demand. as a result, australia ’ s terms of trade are higher than assumed three months ago and look like they will peak higher and later than we had previously assumed. a large build - up of capacity in iron ore, natural gas and coal is planned. over the summer, there have been further announcements of projects that had been proposed being given the “ go - ahead ”, principally in the gas sector. in broad terms, therefore, the main medium - term story the bank has been pointing to for some time still seems to be in place : we are experiencing a terms of trade event of very