philip lowe : recent developments in the global and australian economies speech by mr philip lowe, assistant governor ( economic ) of the reserve bank of australia, at the australian industry group 10th annual economic forum, sydney, 25 march 2010. * * * thank you for the invitation to speak this morning. i am very pleased to be able to continue the long - standing relationship between the reserve bank of australia and the australian industry group. over the years, we have found this relationship very valuable and i hope and trust that this will continue. this morning, i would like to talk about some of the recent developments in both the world and australian economies and the implications of these developments for the outlook for the australian economy. the world economy the world economy is gradually recovering from the worst downturn since world war ii. this recovery though is occurring on two different tracks ( graph 1 ). as a group, the g7 countries are experiencing only relatively weak growth, especially when viewed against the very large contraction in output that occurred. in contrast, the picture in asia is quite different, with many of the economies in the region having had near v - shaped recoveries. there has also been a reasonably solid bounce back in some other parts of the world with, for example, brazil growing quite strongly over the past year. graph 1 world gdp growth per cent, weighted using gdp at ppp exchange rates % g7 economies asia excluding japan % year - ended quarterly - 3 - 3 - 6 - 6 sources : ceic ; rba ; thomson reuters this two - speed world is evident not just in the gdp data but also in the unemployment and inflation data. unemployment rates in both the united states and the euro area are around 10 per cent and a sustained reduction still looks some time off ( graph 2 ). in contrast, unemployment rates are now clearly falling in asia and are much lower than in the major advanced economies. graph 2 unemployment rate % % euro area us higher - income asian economies sources : ceic ; thomson reuters in terms of inflation, in both the united states and the euro area, core measures are still trending down, and they are likely to continue doing so for some time yet ( graph 3 ). again, in contrast, core rates have clearly bottomed in asia and now look to be rising in a number of countries in the region. graph 3 core consumer price inflation six - month - ended annualised % % us euro area % % other east asia ( excluding japan ) china - 3 - 3

environment is very different from that in the middle of the 2000s, this earlier experience suggests that we need to watch the financial side of the global economy very carefully, particularly when interest rates are unusually low. ( iii ) domestic demand in asia the third issue i would like to touch on is the growth of domestic demand in asia. for some decades, many countries in asia have had a growth strategy focused on exports. given the strong growth in consumption in the major western economies, this strategy worked. however, many of the countries in asia recognise that given the subdued outlook for the advanced economies, there will now need to be a stronger emphasis on growth in domestic demand than has been the case in the past. china provides a good example here. over the past two decades, the share of household consumption in chinese gdp has declined from just under 50 per cent to 35 per cent – a very low level by international standards. this decline reflects two broad developments. the first is a reduction in the share of national income going to households ; in the early 1990s, this share stood at nearly 70 per cent, but by late 2008, it had fallen to less than 60 per cent ( graph 6 ). the second factor is an increase in the household saving rate ; in the early 1990s, around 30 per cent of household income was saved, while today this share is close to 40 per cent. graph 6 china – household income and saving % % disposable income saving ratio share of nominal gdp share of disposable income sources : ceic ; rba in china, as in many parts of asia, there is now a recognition that policies to promote consumption are likely to play a more important role than was previously the case. in the past, strong consumption growth was often seen as something that would follow strong exports, rather than be a driver of the economy itself. this view is gradually changing and this is leading to an increased focus on structural reforms to increase the share of national income going to the household sector and to reduce the household saving rate. while reforms in these areas can be difficult, they are important if asia, as a whole, is to continue to grow strongly in the face of subdued demand for exports from the region. how things play out in each of these three areas – public - sector debt, capital flows and structural policies in asia – will have a significant impact on the global environment in which the australian economy finds itself over the year ahead. as the reserve bank has spelt out a number