would show up as gdp growth, though it may be predominantly reflected as higher measured productivity rather than generating a large volume of extra employment. the question will be whether other areas of domestic demand start to strengthen. many households have made progress in reducing debt burdens. at some point that might be bis central bankers ’ speeches expected to lead to such households feeling more inclined to spend. but a complex interaction of factors – asset values and expectations about job security to mention two – will be at work in ways that are not amenable to accurate short - term forecasting. overall, our assumption is that consumption will probably continue to grow at about trend pace, in line with income. public demand is scheduled to be subdued as governments seek to return budget positions to surplus. the near - term outlook for business investment spending outside the resources and resource - related sectors is subdued, judging by currently available leading indicators. in most cycles, it takes time for this sort of investment to turn ; this episode looks like no exception. the exchange rate may also have some role in helping the needed re - balancing. while it ’ s not surprising that the australian dollar has been very strong given the terms of trade event we have had, it is surprising that it has not declined much, at least so far, given that the terms of trade peaked more than a year ago. a lower exchange rate would, of course, need to be accompanied by a pace of growth of domestic unit costs below that seen for much of the past five years, in order to maintain low inflation. one area of stronger potential demand growth is dwelling construction, which has been unusually weak. it is not clear, actually, that the degree of weakness has been adequately explained. various explanations have been offered – interest rates too high, housing prices falling, zoning restrictions, planning delays, construction costs, lack of “ confidence ”, all have featured. at present, at least some of the pre - conditions one might expect to be needed for higher construction seem to be coming into place. interest rates have declined, dwelling prices seem to have stopped falling, rental yields have risen, and the availability of tradespeople is assessed as having improved. we have, moreover, seen a rise in approvals to build. so there is some evidence of a turning point, albeit a belated one. will the net effect of these developments mean that aggregate demand rises roughly in line with the economy ’ s supply potential over the next couple of years, or will a significant gap emerge

this event is not just the peak level observed, but the apparent persistence of high levels. the terms of trade will very likely record over a decade an average level 50 per cent higher than the previous long - term mean. that is a big deal. even with a more pessimistic assumption – say that commodity prices fall by twice as much over the next five years – there is no doubt that this is easily the biggest, and the most persistent, terms of trade event for a very long time. see stevens g ( 2010 ), ‘ the challenge of prosperity ’, rba bulletin, december, pp 69 – 75. i noted two years ago that a ship load of iron ore, which five years previously had had the same value as 2, 200 flat screen television sets, was by late 2010 buying 22, 000 such tvs – an increase in that particular “ terms of trade ” of a factor of ten. as of the current quarter the figure is 28, 000. at the peak, it reached 38, 000. bis central bankers ’ speeches graph 2 still, the terms of trade have peaked, and will probably have fallen by about 15 per cent by the end of this year. further declines over time are likely. so while a high level of the terms of trade continues to add to the level of national income, we can no longer expect that a rising terms of trade will be adding to growth in living standards. we are entering a new phase. this is not so much because of the “ end of the mining boom ”. as a matter of fact, talk of the “ end of the mining boom ” has been somewhat overhyped. the “ boom ” is not so much ended as simply evolving, as these events would be expected to. thoughtful commentators have already pointed out on a number of occasions that there are three phases to the “ boom ”. the first was the rise in prices – something that began as far back as about 2004. the peak in prices was more than a year ago now. the reserve bank began noting that prices had declined in our monthly interest rate announcements in october 2011. but relative prices for natural resources are still high. at this point, the terms of trade are down to the “ peak ” seen in the september quarter of 2008, which was of course a fifty - year high. the second phase of the “ boom ” is the rise in resource sector physical investment. this is aimed at taking advantage of expected high demand for iron ore, coal