we can be tempted to underestimate the likelihood of catching the flu and neglect the need to make build up our defences. 1 macroeconomic environment the german economy is experiencing the longest period of expansion since the country ’ s reunification. this good setting is benefiting households. the positive economic situation and 1 / 5 bis central bankers'speeches sound financing conditions have contributed to the decline in the german unemployment rate. the number of consumer insolvencies has also fallen. as a consequence, household debt as a percentage of gross domestic product, at roughly 50 %, is at its lowest level in two decades. enterprises have boosted their capital from roughly 20 % to 30 % over the past two decades, and leverage in the corporate sector has receded slightly. similarly, high valuations in the financial markets reflect the strong economy and low interest rates. however, they also point to vulnerabilities in the financial system. measured relative to leverage in the corporate sector, risk premia are low – investors are thus charging a very low “ price ” for taking on risk. this is evident not just in germany, but also from an international perspective. real estate prices in germany have been rising steadily since the onset of the financial crisis, not just in urban centres. according to bundesbank estimates, real estate prices exceed levels that would be justified by fundamentals such as regional or demographic patterns by about 15 – 30 %. let me therefore give you a more detailed description of the vulnerabilities lurking in germany ’ s financial system. 2 underestimating credit risk future credit risk might be underestimated. the good situation for enterprises at present is being reflected in low provisioning at banks. this has contributed to the rise in banks ’ capital ratios. however, the risk - weighted capital ratio rose by more than the unweighted ratio. larger, systemically important financial institutions tend to have lower unweighted capital ratios than smaller banks. an economic downturn would put pressure on banks ’ capital buffers due to the ensuing credit losses and increasing risk weights. this could reverse the trend observed over the past ten years. this period has seen the average risk weights for corporate loans and in retail banking – that is to say, business with households and small and medium - sized enterprises – decline. furthermore, banks have restructured their investment portfolios towards exposures with lower risk weights. however, a glance at banks ’ credit portfolios also shows that there has been a shift in the borrower structure.

to understand fully why things look different in so many countries and how persistent this will be. part of the story is likely to be changes in the bargaining power of workers and an increase in the supply of workers as the global economy becomes increasingly integrated. but another important part of the story lies in the nature of recent technological progress. there are a couple of aspects of this progress that are worth pointing out. one is that it has been heavily focused on software and information technology, rather than installing new and better machines – or on intangible capital rather than physical capital. the second is that the dispersion of technology and productivity between leading and lagging firms has increased, perhaps because of the uneven ability of firms to innovate and use the new technologies. the oecd has done some very interesting work documenting this increasing productivity gap. both of these aspects of technological progress are affecting wage dynamics. the returns to those who can develop and best use information technology have increased strongly. these returns, though, are often highly concentrated in a few firms and in only certain segments of the labour market. at the same time, the firms that are not able to innovate and take advantage of new technologies as quickly are slipping behind and they feel under pressure. as a way of remaining competitive, many of these firms are responding by having a very strong focus on cost control. in many cases this translates into a focus on controlling labour costs. this cost - control mentality does not make for an environment where firms are willing to pay larger wage increases. http : / / www. rba. gov. au / speeches / 2018 / sp - gov - 2018 - 06 - 13. html 8 / 15 13 / 06 / 2018 productivity, wages and prosperity | speeches | rba over time, we can expect the diffusion of new technology to take place. this is what the historical record suggests. i am optimistic that this diffusion will boost aggregate productivity and lift our real wages and incomes. advances in information technology, in artificial intelligence and in machine learning have the potential to reshape our economies profoundly and lift average living standards in ways that are difficult to envisage today. but the adoption and the diffusion of these new technologies is a gradual process ; it takes time. while it is taking place, the benefits of new technologies are accruing unevenly across the community. in my view, this is one of the key structural factors at work. whatever weight one places on these various factors constraining