score a point, they could say we are not very good forecasters. i would concede that we have been a little conservative in our forecasts, but it has not led us astray in a policy sense, i. e. it has not jeopardised the achievement of a good economic outcome. as someone who has been involved in forecasting and economic policy in the lean years as well as the good, there is a more interesting question that has to be asked. it is this : how is it that the australian economy has been able to grow at 4½ per cent plus per annum in the seventh and eighth years of an economic expansion without generating significant wage and price pressures? it certainly was not able to do so in earlier expansions. i have already given part of the answer to this question in my december testimony, and in a couple of speeches since. it is that the economy has achieved improved productivity growth as a result of the micro - economic reforms of the past fifteen years. the main changes have been reductions in tariffs, privatisations, financial deregulation, competition policy and labour market reforms. of course, businesses have also become much leaner and more adaptable as they have responded to increased competitive pressure. the key piece of evidence for this is the higher growth of multi - factor productivity in australia in this expansion compared with previous ones. a lot more could be said about this subject, but i will leave it to others, and move on to a related subject. it seems to me to be quite possible to have higher productivity growth and yet to still encounter macro - economic imbalances which would bring an economic expansion to a halt. in other words, higher productivity growth can explain why the economy ’ s average growth rate is faster, but i do not think it can provide an adequate answer for why the expansion will last longer. to do this, i think a macro - economic explanation is required. here i have to come back to low inflation and low inflationary expectations, which have characterised the 1990s expansion, but were clearly absent from earlier expansions. as the earlier expansions matured, inflationary pressures built up which simultaneously pushed up prices ( requiring a monetary policy response ) and squeezed businesses and business confidence. in the mid - 1970s and early 1980s the expansions came to an end with a wage explosion, while in the late 1980s it was an asset price boom and bust. this time we have had neither of these. as i said, a

high exchange rate by doing whatever they could to make themselves more competitive. the more positive outlook in the tourism industry is also being supported by the steadily increasing number of visitors from china. bis central bankers ’ speeches this depreciation of the australian dollar since april is a welcome development, and a further depreciation would be helpful in rebalancing growth in the economy. ultimately, floating exchange rates adjust to the relative returns on capital across countries. when investment in australia was very high and rising, and investment elsewhere in the world was very weak and falling, it was not surprising that the australian dollar was at quite a high level. this was a textbook response to an investment boom. but the textbook would also predict that as the mining investment boom in australia unwinds and, hopefully, investment in the developed economies picks up, some realignment of the relative value of the australian dollar would occur. this process has started, although it has been interrupted recently, partly due to the changed outlook for us monetary policy. whether we will see a further realignment remains unclear, but, from today ’ s perspective, a lower value of the australian dollar would assist in lifting investment and activity in the sectors that have been constrained during the years of the mining investment boom. the second factor on my list is an improvement in business confidence over recent months, which is evident in a graph that i showed earlier ( graph 6 ). this improvement is also apparent in our discussions with businesses, and there has also been a lift in consumer confidence. these are positive developments. just as a lack of confidence about the economy can be self - fulfilling, so too can be a recovery in confidence. if businesses are prepared to spend, jobs tend to get created, incomes tend to rise and people see opportunities where previously they saw none. so an important issue here is whether this improvement in confidence will be sustained. a fair amount depends upon international events. if global growth is in line with most forecasters ’ central outlook, it is quite possible that confidence, both overseas and in australia, will be sustained at a higher level than it has been in recent times. there are, however, a range of things that could go wrong, with the latest wrangling over the us debt ceiling providing just the latest example of developments that damage confidence. but beyond international events, domestic policy choices also matter. business confidence – and thus the preparedness to take risk – is likely to be higher if the policy environment is predictable and there is strong