glenn stevens : reviewing the australian economy ’ s performance opening statement by mr glenn stevens, governor of the reserve bank of australia, to the house of representatives standing committee on economics, sydney, 4 april 2008. * * * mr chairman, my colleagues and i are pleased to be able to appear before this newly re formed standing committee. i look forward to productive sessions with you over the life of this parliament. i shall begin by reviewing the economy ’ s performance over the past year or so. i will then offer some comments about the current conjuncture, and some of the issues that we face in the period ahead. all this provides some context for our discussion about monetary policy. the australian economy recorded another very strong year in 2007. real gdp expanded by about 4 per cent. growth in domestic final demand was even stronger, at over 5½ per cent. the rate of unemployment declined further, in the most recent readings reaching its lowest level since the mid 1970s. indicators of capacity utilisation reached their highest levels for two decades, and firms continued to report considerable difficulty in expanding operations, due to shortages of suitable staff. these outcomes for demand and output growth exceeded those in either of the preceding two years, and were stronger than was expected a year ago, particularly in the case of domestic demand. in explaining these trends, a noteworthy factor is that the global economy continued to offer a very supportive environment for australia, notwithstanding the evident deterioration in the united states and the serious disturbances in international capital markets in the latter part of the year. the cumulative impact of the very large rise in australia ’ s terms of trade over a number of years continued to flow through the economy. very high levels of confidence in the business community saw robust growth, from already high levels, in capital spending. this was most pronounced in the resources sector, which is not surprising given the level of demand and the record prices being paid for its output, but the strength was not confined to that sector. to this was added the response of governments and associated enterprises to the need for upgrades to public infrastructure and other demands, which saw public final spending rise at about twice its trend pace over the course of 2007. finally, consumer demand also rose at a pace well above average, fed by a rate of growth of real household disposable income as high as anything seen in the past 20 years. the only major expenditure aggregate that was on the soft side was dwelling investment. while there continue to be differences in the degree of overall strength

often better than our upside scenarios as well. as an illustration, in august our central forecast was that the unemployment rate would end 2020 at close to 10 per cent and still be above 7 per cent at the end of 2022 ( graph 1 ). in our upside scenario, the unemployment rate was expected to end 2020 a little lower than 10 per cent, but still be around 7 per cent later this year. thankfully, the actual outcome for the unemployment rate has been much better than this, with the peak now looking to be behind us and the unemployment rate ending 2020 at 6. 6 per cent. graph 1 1 / 7 bis central bankers'speeches it is reasonable to ask : what explains these better - than - expected outcomes? there are 3 factors that i would like to point to. the first is the success that australia has had in containing the virus. that success has meant that the restrictions on activity have been less disruptive than we feared. it has allowed more of us to get back to work sooner and it has reduced some of the economic scarring from the pandemic. as is increasingly clear from experience both here and overseas, the health of the population and the health of the economy are inextricably linked. the second factor is the very significant fiscal policy support in australia, which as measured by the change in the aggregate budget position is almost 15 per cent of gdp ( graph 2 ). most of this support has been delivered by the australian government, but the states and territories have also played a role too. this support has been more substantial than was assumed in august and has made a real difference. it has provided a welcome boost to incomes and jobs and helped front load the recovery by creating incentives for people to bring forward spending. there has also been a positive interaction with the better health outcomes, which have allowed the policy support to gain more traction than would otherwise have been the case. graph 2 the third factor is that australians adapted and innovated. when the virus first came to our shores, many people hunkered down, but as the days wore on, households and businesses adjusted and changed what they do and how they do it. this resilience has helped keep the economy going and kept people in jobs. many firms changed their business models, moved online, used new technologies and reconfigured their supply lines. households adjusted too, with spending patterns changing very significantly. some of the spending that would normally have been done on travel and entertainment has been