though, which perhaps illustrates why that definition is not very useful. graph 1 the net result is that the australian economy has been contracting, though on the best information we have, not at the pace seen in a number of other countries, where quarterly declines in real gdp of 3, 4 or even 5 per cent have been observed in the last quarter of 2008 and are likely to have occurred in the first quarter of 2009. a key dimension through which australia experiences the global business cycle is the terms of trade, a gauge of the income gains or losses that international relative price changes impart to australia. over the five years to 2008, a period of exceptional strength in the global economy, the terms of trade rose by about 60 per cent, equivalent to about 12 per cent of a year ’ s gdp – about $ 140 billion – in additional annual income. it was the biggest such gain in half a century. now, the terms of trade are falling, reversing part, though so far only part, of that earlier gain. i would like to make two points, however, about those terms of trade swings. the first is that, in earlier episodes such as in the early 1950s, and the mid and late 1970s, very large terms of trade movements seriously destabilised the economy. on this occasion, there have been plenty of adjustment challenges – generally coming under the heading of the so - called “ two speed economy ”, where the resource - intensive regions and industries grew quickly and others slowed. but for all that, a floating exchange rate, a much more flexible labour market and better macroeconomic policy frameworks have helped the economy adapt to the terms of trade swings without the degree of instability seen in the past. that is a testament to the arrangements that are now in place. the second point is that, at this stage, the fall in the terms of trade that is occurring does not seem to be reversing all of the previous rise. even with the large falls in prospect for contract prices for bulk commodities, australia ’ s terms of trade look like they could, at the end of this year, still be about 40 per cent higher than the average for the period from 1980 to 2000. perhaps that will not persist. alternatively, perhaps what commodities markets are telling us is that some factors beneficial to australia – foremost the continued likely emergence of china – remain in place. it is probably not entirely coincidental that the clearest signs of a turning point in economic activity appear to be acc

glenn stevens : the road to recovery address by mr glenn stevens, governor of the reserve bank of australia, to the australian institute of company directors, directors luncheon, adelaide, 21 april 2009. * * * the global economy is in recession. virtually all of australia ’ s trading partners are contracting. in fact almost every country with which we would normally make comparisons is in recession, and for many of them it is a bad one. it is very rare for australia to escape an international downturn and there is no precedent for avoiding one of this size. we, like most countries, have trade and financial linkages to the rest of the world. we are all aware of what happens abroad, and our own expectations and economic behaviour cannot but be affected by those events. whether or not the next gdp statistic, due in early june, shows another decline, i think the reasonable person, looking at all the information available now, would come to the conclusion that the australian economy, too, is in recession. 1 these are periods of hardship for significant parts of the community. people lose jobs, businesses fail, loans go bad, and plans are unfulfilled. as such, they are to be avoided if possible and at least ameliorated when they occur. it is for the latter reason that most countries today have extensive social safety nets, so that when recessions do occur, we can avoid the extent of outright misery seen in episodes like the 1930s. policy - makers also seek to cushion such downturns with macroeconomic policy. they are usually more successful if they have managed to restrain the preceding boom. but no country ’ s policy - makers have been able to eliminate the business cycle, much as they have all tried. cyclical behaviour has always been a feature of market economies. it always will be. should you see, at some future time, a claim to the contrary, it would be advisable to treat it with great scepticism and, indeed, as a possible indication that a cyclical turning point is in the offing. most of the time, economic activity expands, as population growth, increasing wealth and aspirations to higher living standards lead to more demand, while a growing workforce, higher productivity and technological innovation push up supply capacity. that is the normal situation for an economy. but every so often – on average about once every seven or eight years, but not regularly enough to predict with accuracy – a set of conditions arises that sees demand weaken for