restaurants in melbourne and sydney. this chain starts with the high terms of trade that has pushed up the australian dollar. in turn, the high dollar has meant that the prices that australians pay for many manufactured goods are, on average, no higher than they were a decade ago, despite average household incomes having increased by more than 60 per cent over this period. the stable prices for many goods, combined with strong disposable income growth means there is more disposable income to be spent on services in the cities and towns far from where the resources boom is taking place. as i said, this chain can be hard to see, but it is real, and it is one of the factors that have had a material effect on the australian economy over recent years. at the same time, the high exchange rate is having a contractionary effect on other parts of the economy, as it reduces the international competitiveness of some industries. over recent months, the australian dollar has appreciated despite the uncertainty about the global economic outlook and some decline in commodity prices since mid 2011. after adjusting for differences in inflation rates across countries, the exchange rate is currently at around its highest level since the early 1970s ( graph 6 ). the effects of the high exchange rate are evident in the manufacturing, tourism and education sectors, as well as some parts of the agriculture sector and, more recently, in some business services sectors. with the exchange rate having been high for some time now, more businesses are re - evaluating their strategies, as well as their medium - term prospects. in some cases, this is prompting renewed investment to improve firms ’ international competitiveness. but in other cases, businesses are scaling back their operations in australia and some are closing down. these changes are obviously very difficult for the firms and individuals involved. both the investment boom and the very high level of the exchange rate are historically very unusual events. this makes it difficult to assess their net effect. it seems, however, that over the past year these forces have balanced out reasonably evenly. abstracting from the weather - related disruptions in early 2011, gdp growth over the year was likely to have been around trend. underlying inflation was at the midpoint of the medium - term target range. the unemployment rate remained low at 5 – 5¼ per cent. and most lending rates in the economy were around average by end year. it is fair to say that very few developed economies could make these same claims. bis central bankers ’ speeches looking forward, there

”, address to bloomberg seminar, sydney, 14 february 2012. bis central bankers ’ speeches the size of the fiscal consolidations in individual countries is unprecedented, but rather because the consolidations are occurring simultaneously in a large number of countries. unusually, they are also taking place in an environment where output in the affected countries is considerably below potential. the economic literature is mixed on the effects of fiscal consolidation on growth. there are certainly some examples where consolidation has been associated with fairly strong gdp growth. but in most of these examples, the countries undertaking the fiscal consolidation have benefited from some combination of robust growth in their trading partners, an easing of monetary policy and a depreciation of their exchange rate. given the nature of the current situation, it is unlikely that the advanced economies, as a whole, can benefit from these factors. there is therefore a material risk that fiscal consolidation weakens growth in the short run, which leads to more fiscal consolidation in order to meet previously announced targets and, in turn, yet weaker growth. we are currently seeing this dynamic play out in a couple of the countries in southern europe. if it is not to be repeated on a wider scale, the fiscal consolidation in the north atlantic economies will need to be accompanied by reforms to the supply side that lift the underlying rate of growth of these economies. as interesting as the developments in europe are, it is important that we do not lose sight of what is going on elsewhere in the world. in the united states, the recent data, particularly on the labour market, have been better than was widely expected ( graph 3 ). there are also some tentative signs of improvement in the housing market. corporate balance sheets are generally in good shape and borrowing costs are low. while, undoubtedly, the us economy still faces many challenges, it does seem to have emerged from the soft patch in the middle of 2011 with some momentum. the chinese economy is also continuing to grow solidly. the pace of growth has slowed, but it has done so in line with the authorities ’ intentions. inflation in china has also moderated. across the rest of east asia, the recent data have been mixed. nevertheless, for the region as a whole, growth in 2012 is expected to be around trend, with domestic demand likely to play a more important role in generating growth than it has for most of the past two decades. overall, as the imf recently noted, the global risks still look to be tilted to the downside. but the better - than