that the downturn we are having may turn out not to be one of the more serious ones of the post - war era, in contrast to the experiences of so many other countries. it is becoming more common for australians to see the glass as half full than as half empty. put another way, we can much more easily imagine upside risks to the outlook, to balance out the downside ones, than was the case six months ago. so far, so good. but what challenges lie ahead? and how should we respond to them? just as it would have been a mistake nine months ago to write - off our long - term economic prospects at the height of the financial turmoil, it would be a mistake now to lapse into the comfortable assumption that easy prosperity will come our way. the pace of global growth, and the easy availability of credit, seen in the period up to 2007 was not the norm. it is unlikely to be seen again any time soon. the path to economic health for the major countries of the world will still be a difficult one, because the legacy of the crisis will cast a shadow for some time. major international banks will remain diminished in stature and balance sheet capability, and will be required to devote more capital to their strategies in the future. if global regulators have their way, the world will be characterised by less leverage, and scarcer and more expensive credit, than in the earlier period. we here in australia have to accept that fact and accommodate it in our thinking. one thing this presumably means is that the prominence of household demand in driving the expansion from the mid 1990s to the mid 2000s should not be expected to recur in the next upswing. the rise in household leverage, the much lower rate of saving out of current income, and the rise in asset values we saw since the mid 1990s, are far more likely to have been features of a one - time adjustment, albeit a fairly drawn - out one, than of a permanent trend. moreover the risks associated with those trends going too far are apparent from events in other countries. these risks have been reasonably contained so far in australia – but it would be prudent not to push our luck here. a very real challenge in the near term is the following : how to ensure that the ready availability and low cost of housing finance is translated into more dwellings, not just higher prices. given the circumstances – the economy moving to a position of less than full employment, with labour shortages lessening and reduced pressure

debts were this large, or even much larger. they were mostly, however, war - time precedents, and wars have tended to be inflationary for the combatants. likewise, largescale expansions of central bank balance sheets have usually been seen as a fairly sure way of debasing the value of a currency. so at present, we have the unusual situation where some, who look at the prospective deficits and debt burdens, combined with ‘ unconventional ’ monetary policy measures, worry about high inflation down the road, even as others worry about the possibility of deflation over a shorter time horizon, as a result of large - scale overcapacity. logically, subject to one or two important assumptions, there must exist a path that avoids both these unpalatable alternatives – deflation and inflation. finding that path is the challenge for policymakers around the world over the next several years. faced with a large downturn like this, it was the right thing to do to allow budgets to go into deficit. over time, though, there will obviously need to be fiscal consolidation. this will be easiest where the fiscal measures taken were temporary : it would be a matter mainly of not repeating the measures. where more permanent measures were enacted, it will be more of a hard grind to get onto the path of sustainability. in some countries, moreover, the legacy of the excesses of the earlier part of this decade, and of the steps needed to cope with their subsequent unwinding, is likely to be quite persistent. some major country governments have assumed, one way or another, a significant part of the obligations associated with earlier poor decisions by lenders and investors. moreover, the level of potential output in some economies may have taken a step down, which will make the path back to fiscal sustainability more difficult to reach. in the countries concerned, there was no alternative to these actions ; inaction would have been more costly. nonetheless, all of this suggests that, in those countries, constraints on economic policy are likely to last for some time. the higher debt burdens will limit the extent to which worthwhile structural spending levels can be maintained for other things – like in health, education, urban infrastructure and so on. moreover, the capacity to respond with fiscal policy to another economic downturn, should there be one, would be much more limited. over time, these constraints will tend to become more apparent. of course they might be disguised for a while under conditions of higher inflation