of times recently, our central scenario is a relatively positive one. the economies in asia are expected to continue growing reasonably solidly, while the advanced economies are expected to have only a subdued recovery, weighed down by the need to consolidate balance sheets in both the household and public sectors. around this central scenario there are, however, clearly risks, particularly associated with the three issues that i have just touched on. given these risks, one question is how should policy be set? the reserve bank ’ s general approach has been to proceed on the basis of the central scenario, but be prepared to respond if things turn out differently, as we did in late 2008 when the global outlook took a marked turn for the worse. the alternative of waiting to see how the myriad of risks evolves before adjusting policy runs the significant downside of moving too late, particularly given that the economy is starting this upswing with less spare capacity than in previous upswings. fortunately, in australia we have had the policy flexibility to respond to changing events as they have occurred and this has served us well. the australian economy i would now like to turn more specifically to the australian economy, where the run of data over the past few months has tended to be on the firm side. employment growth has been robust, business and consumer confidence is above average, the housing market has been strong, and there are signs that the period of business deleveraging is coming to an end ( graph 7 ). collectively, these outcomes provide us with some confidence that the economy is now in a reasonably solid upswing. graph 7 unemployment and business confidence % % unemployment rate % % business confidence * - 15 - 15 - 30 - 30 - 45 - 45 * net balance ; deviation from long - run average sources : abs ; nab ; rba over the course of this year, the nature of this upswing is, however, likely to change somewhat. recently, the overall level of spending in australia has been supported by strong growth in public - sector demand. this has occurred at a time when growth in private - sector demand has been relatively weak ( graph 8 ). as we move into the second half of 2010, this configuration is likely to change. public - sector investment is projected to decline, particularly as spending on the federal government ’ s school building program tails off. but moving in the other direction, private - sector business investment is expected to strengthen further, particularly in the resources sector. graph 8 domestic final demand growth * financial years %

the preservation of price stability over the medium term, somewhat counterbalances the multiple factors which currently have an adverse effect on economic activity. in the current environment of heightened uncertainty, stability has become an even more precious asset. as is well known, the eurosystem ’ s primary objective is to maintain price stability over the medium term, since price stability unambiguously represents a precondition for sustainable economic growth and rising employment in the long run. moreover, in times of severe tension, it is of the utmost importance that policymakers do not lose sight of their primary responsibility, so as to reduce uncertainty and strengthen confidence. consequently, the governing council of the ecb stands ready to act if necessary. and financial markets can rely on the provision of sufficient liquidity even under exceptional circumstances, as was demonstrated in the past. as to military action in iraq, the impact of this confrontation on the global economy can vary significantly in scope and size, depending on the extent and duration of the conflict. it is therefore not possible at this juncture to conclusively assess the short and medium - term implications for the euro area. the euro area has established itself as a stable monetary anchor in the global economy. that notwithstanding, one has to acknowledge that much remains to be done. the stability and growth pact obliges euro area member states to achieve budgetary positions close to balance or in surplus in a sustainable manner, in order to minimize the risk of breaching the budget deficit criterion of 3 % of gdp in the course of a business cycle. sound budgetary positions not only create enough leeway for automatic stabilizers to take full effect over the cycle, they contribute to reducing the debt - to - gdp ratio and consequently the interest burden for governments, increase investors ’ confidence in the euro area and therefore keep interest rates lower than they would otherwise be. moreover, demographic developments make it imperative to bring public finances into structural balance or surplus. even though in most countries the current fiscal policy stance, as envisaged in the updated stability programs, strikes a reasonable balance between letting automatic stabilizers operate and seeking further consolidation where needed, some countries ’ current consolidation plans lack ambition, particularly over the medium run, once the current slump has in all likelihood been overcome. it is necessary that all euro area countries live up to their obligations in full. fiscal policy must be part of a comprehensive and growth - oriented strategy, focusing - as a rule - on restraining the volume and on improving the structure of public expenditures