through 1998 / 99 is more likely to be somewhere between 2½ and 3 per cent. implicit in this is that the coming quarterly growth rates will be noticeably lower than the ones we experienced over the past year. some slowing seems to be inevitable, given the weaker outlook for the world economy. since we last met in may, most forecasters have revised down expectations. the imf, to take just one example, has revised down its forecast for world growth in 1998 from 3 per cent to 2 per cent, and for 1999 from 3¾ per cent to 2½ per cent. if these estimates are a reasonable guide, then the external environment will remain difficult and income from external sources constrained. of course, domestic demand has been, and remains, much stronger than external demand, and so australia ’ s expenditure has run ahead of national income over the past year. but that gap cannot be expected to continue to grow at the same pace indefinitely, and so both domestic demand and gdp growth must be expected to come down over coming quarters. with slower growth in the offing, we expect that the unemployment rate will flatten out. of course, we said that last time ; now we are suggesting it will occur at a slightly lower rate of unemployment than we formerly expected. we expect the four - quarters - ended increase in the cpi to be about 2½ per cent by the end of the financial year - that is, in the short term, we expect inflation performance to be consistent with our target. of course, any forecast of inflation beyond that period is only as good as its assumption about the future path of the exchange rate. given the current tendency towards lower commodity prices, we are assuming some further widening in the current account deficit to about 5½ per cent of gdp in 1998 / 99. with an annual figure of this size, it would not be surprising to see a quarter or two of it running at over 6 per cent of gdp. i made the same comment in march this year, and again in may at our previous hearing. i expected that it would have come to pass by now, but it has not. it would not surprise me, however, if it does happen some time in the next year. this set of outcomes, or something like it, would represent a good performance for an economy in its eighth year of expansion facing a difficult, but not disastrous, external environment. i expect that it would be well received by the domestic and international investment community, though one can never take this

for granted. and, of course, if the assumptions we are making about the world economy turn out to be too optimistic, all bets would be off. i now come to the second part of my testimony, in which i attempt to answer the question of why we have done better than most other countries in asia or the pacific rim. in doing so, i am conscious that the story is not yet over, so this is really an interim report. i think a number of factors have been involved and i will list them in no particular order. as we go through them, it will become apparent that they are all intertwined. first, i think the asian crisis hit at a time when the australian economy was in good shape, partly for cyclical reasons. by mid - 1997, the economy was growing strongly and inflation was lower than our target. had we not received a contractionary impulse from the asian crisis, we may have been facing the need to tighten policy because of a potential overheating. no - one will ever know, but it is a possibility. i am conscious that attributing our performance over the past 18 months to our good starting point is rather superficial because it does not explain why the starting point was so good. but i will come back to that later. second, i think we have benefited from the flexibility of our exporters, who have switched from the contracting asian markets into the expanding north american and european ones, and into a number of other markets we do not usually think of as being important to us. the nature of our exports - with so much of them being commodities - has helped, but the efforts of our marketing companies and authorities should not be ignored. even so, it has not proved possible to prevent exports from falling, and over the year to the september quarter they fell by 2 per cent in volume. third, australia has benefited from a greatly improved perception of the soundness of its economic policies. the fact that the budget has moved back into surplus - where it should be in the mature phase of an economic expansion - has been important. so has nearly a decade of low inflation. also important on this occasion has been the recognition that australia scores well on such factors as its regulation of banks, other financial institutions and stock exchanges, and that its underlying body of commercial law and accounting practice is at or close to world best practice. not only have the international capital markets taken a better view of australia, but we also seem to have more confidence in