##ilient. australians and canadians also understand that the benefits from openness can fall unevenly across our communities. we recognise that while openness makes the size of the pie bigger, it can also affect the distribution of the pie in a way that our societies feel uncomfortable with. this is something that we have both tried to address and have had more success on this front than some other countries. with that introduction, the main focus of my remarks this morning is on the outlook for the australian economy. i would like to talk about this outlook in the context of three issues that i hope will have strong resonance with the canadians in the audience. the first of these is the cycle in investment in the resources sector. the second is developments in the housing market and household borrowing. and the third is inflation targeting in a low inflation, low interest rate environment. 1 / 12 bis central bankers'speeches the outlook the rba released its latest economic forecasts a couple of weeks ago. we expect economic growth to be around 3 per cent over the next couple of years. this is a little faster than our current estimate of the potential growth of our economy. despite this, we do not expect much change in the current rate of unemployment, which stands at around 5¾ per cent. this is because some of the above - potential growth is a result of the expansion of lng production, which does not employ that many people. given this outlook, we expect underlying inflation to increase, but to do so only gradually. wage growth remains subdued, but is not expected to decline further, and spare capacity is likely to remain in the economy for some time yet. our central forecast is for headline inflation to increase to above 2 per cent later this year, boosted by increases in oil and tobacco prices. the increase in underlying inflation is expected to be a bit more gradual. commodities and investment the first of the three issues that i expect will strike a resonance with canadians is the shifts in commodity prices and investment in the resources sector. this is a major factor that has shaped economic outcomes in both our countries. while the general stories are similar, the details are different. one area of difference is the size of the movements in the prices of our main exports, summarised in the terms of trade ( graph 1 ). australia ’ s terms of trade almost doubled over the first decade of this century and in 2011 reached their highest level since the gold rushes of the 1850s. the increase in canada was also large in a historical context,

although it was not as large as that in australia. 2 / 12 bis central bankers'speeches this difference reflects two factors. the first is that the prices of australia ’ s main commodity exports – iron ore and coal – increased by significantly more than the price of canada ’ s main commodity export, oil. the short - run supply curve in iron ore and coal tends to be very steep, so the prices for these steel - making commodities increased very sharply when chinese investment in property and infrastructure really took off. the second factor is that commodities make up a larger share of australia ’ s total exports than is the case for canada. both of our countries have also experienced a pronounced cycle in mining investment. not surprisingly, reflecting the larger movement in our commodity prices, the cycle has been bigger in australia. here, mining investment went from 2 per cent of gdp in the early 2000s to 9 per cent in 2012 ( graph 2 ). another difference with canada is that our main export partner, china, has grown at an average rate of almost 10 per cent over this period, compared with just 2 per cent average growth in canada ’ s main export partner, the united states. 3 / 12 bis central bankers'speeches both our countries accommodated the increase in mining investment without overheating. our flexible exchange rates played an important role here. given the larger cycle in mining investment here, the impact on the rest of the economy has been more pronounced. while many parts of our economy did well from the boom in mining investment, others did not as they dealt with the higher exchange rate and found it difficult and more expensive to hire workers. one illustration of this broad impact is the substantial decline in australia in non - mining investment as a share of gdp from the mid 2000s ( graph 2 ). by way of contrast, canadian non - mining investment has shown much less variation. for some time, a major factor shaping our forecasts for the australian economy has been a rebalancing of investment between the resources and non - resources sectors. we estimate that the decline of mining investment back to normal levels is around 90 per cent done. so this headwind, which has been weighing on gdp growth for some time, will blow itself out before too long. another headwind we have had for some years is the fall in commodity prices, but this has turned into a gentle tailwind since mid last year. since then the prices of all our main commodity exports have risen. this is good news for us, although we are