ian macfarlane : economic developments at home and abroad speech by mr i j macfarlane, governor of the reserve bank of australia, to the joint australian business economists and economic society ( new south wales branch ), sydney, 10 july 2001. * * * it is a pleasure to be here again talking to the australian business economists and the economic society. on occasions like this, i often feel it would be nice to be able to speak in a detached way on some interesting public policy or historical topic. but in periods where the domestic and world economies are evolving quite quickly, current economic developments keep pushing their way to the front. so i will have to save my more scholarly piece for another day, and confine my remarks tonight to some observations on recent economic events here and abroad. i would like to take as my starting point the way we viewed the economic outlook for australia about a year ago, that is, as we were entering the 2000 / 01 financial year. at that time, there were two main components to our view of the economic outlook. the first was a view on the medium - term cyclical development of the economy, which was predominantly optimistic. the second was a view about the effect of " once - off " events such as the introduction of the gst and the sydney olympics on the financial year 2000 / 01 ; here, the tone was one of uncertainty. i would now like to spell out how these two overlapping views have fared in the light of unfolding developments. 1. the medium - term cyclical outlook for some years now, we have pointed to the prospect of achieving a longer economic expansion if the economy can be managed in a way which avoids the type of imbalances that have brought about our downfall in the past. by the middle of last year, we were able to point out that it had already happened, in that the present expansion was already longer than its predecessors. but we were saying more than this – we were saying that, even though it was longer, it still had not shown any of the imbalances that characterised the latter stages of earlier expansions : · although inflation of goods and services prices had risen, it was not by enough to threaten our medium - term objective ; · asset price inflation of either shares or property had not become a problem ; · wages growth remained moderate ; · there had not been excessive physical investment with its attendant risk of over - capacity ; and · the current account deficit was not high by the standards of the past

and the set of relative prices that goes with it. it seems to be doing so more quickly than was generally assumed. australia australia sits in an interesting position here. like our asian neighbours we were affected by the events of late 2008. but the downturn was fairly brief. we were in a position to apply a liberal dose of stimulus to the economy, which was done in a timely fashion. the banks remained in good shape. hence recovery began in the first half of 2009. a strong asian recovery has also helped australia. as in other developed countries, our consumers feel the effects of higher commodity prices as a reduction in real income. but since australia is also a producer, the big rise in demand for energy, resources and food is expansionary for the economy. in fact, with our terms of trade at by far their highest level, on a five - year average basis, in more than a century, these events are very expansionary indeed. a very large increase in investment in the resources sector is under way and has a good deal further to run yet. just recently, we have been experiencing growth close to trend, relatively low unemployment – about 5 per cent – and moderate inflation, about 2¼ per cent in underlying terms. in comparison with the experience of the past generation, that is a pretty good combination. looking ahead, our job is to try to manage the terms of trade and investment booms. historically, australia has often not managed periods of prosperity conferred on us by global trends terribly well. on this occasion, we have to do better. we have to take the opportunity to capitalise effectively on some very powerful trends in the global economy to which we are, almost uniquely, positively exposed. a few things are working in our favour. one is that the exchange rate is playing a role of helping the economy to adjust to the change in the terms of trade in a way that it was prevented from doing on numerous previous occasions. another is that, at least so far, households are behaving with a degree of caution, insofar as spending and borrowing are see, for example, the un food and agriculture organization ( fao ) discussion paper “ how to feed the world in 2050 ”, which was prepared for a high - level expert forum of the same name held in rome on 12 – 13 october 2009. the document, and other background information, is available at : < http : / / www. fao. org / wsfs / forum2050