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For the third time this year, Reserve Bank Governor, Glenn Stevens, has attempted to give Australia and Australians a sense of what has to be done to "make sure that the road to recovery will connect to the road to prosperity," as he put it last night in a speech in Melbourne.

His speech last night laid out the benefits that lie ahead if we get it right, but didn't try to avoid the considerable obstacles that we face.

But he was optimistic, making the point that if we learned from the reasons why we were not (so far) badly damaged by the global crisis, we can succeed.

Mr Stevens again mentioned his previously-stated fears that property and housing prices could become a problem, along with labour shortages, uneven development patterns in the economy and huge current account deficits.

There was no mention of interest rates or the dollar, but both were there, in the background, especially when he discussed the challenges coming in the wider economy from a new resources surge.

It was against that background that he last night gave the third of a trio of major speeches this year looking at our economic condition.

They started in April with a look at The Road to Recovery, with the issue then was how to get onto that road:

In late July, with the country's return to that road safely assumed, he spoke about The Challenges to Economic Policy, in Sydney, with some comments on property and housing that still resonate:

"A very real challenge in the near term is the following: how to ensure that the ready availability and low cost of housing finance is translated into more dwellings, not just higher prices.

"Given the circumstances - the economy moving to a position of less than full employment, with labour shortages lessening and reduced pressure on prices for raw material inputs - this ought to be the time when we can add to the dwelling stock without a major run-up in prices.

"If we fail to do that - if all we end up with is higher prices and not many more dwellings - then it will be very disappointing, indeed quite disturbing.

"Not only would it confirm that there are serious supply-side impediments to producing one of the things that previous generations of Australians have taken for granted, namely affordable shelter, it would also pose elevated risks of problems of over-leverage and asset price deflation down the track."

That was construed as a warning that the RBA would not let a housing bubble develop: something Mr Stevens has pointed out was not the purpose of his comments. He was talking about the dangers to the wider community of allowing a property and housing price explosion to go for too long.

And last night in the third of his major speeches, there was more in a similar vein: "there is no such thing as effortless, or riskless, prosperity," he told his Melbourne audience.

"There is still a business cycle, and we do well to remember that even if we have been spared the worst of the recent downturn.

"We will need to continue investing in all the things that helped us get through the recent episode.

"And we will need to accept and manage various changes that will probably confront us over the years ahead. The road to prosperity will have some bumps, twists and turns.

"But it is the road to the right destination."

But before we get there, he said had to have a good appreciation of what needs to be done in the wake of our surviving the GFC and Great Recession

"The key question is: having had a fairly shallow downturn, how do we make the upswing long and stable, and relatively free of serious imbalances?" Mr Stevens asked.

"At least part of the answer is that we will need to re-invest in the same policy discipline, and the same careful private-sector management, that paid dividends in the recent episode.

"That means keeping tested frameworks in place, amended as necessary in the light of experience.

"It means unwinding temporary measures as appropriate. It means keeping a focus on flexibility.

"And perhaps most of all, it means resisting the temptation to assume prosperity is easily achieved, or easily managed.

"In that spirit, let me offer three observations.

"First, we start this upswing with less spare capacity than some previous ones.

"After a big recession, it usually takes some years for well-above-trend growth in demand to use up the spare capacity created by the recession. This time that process will not take as long. Most measures of capacity utilisation, unemployment and underemployment are much more like what we saw after the slowdown in 2001, than what we saw after the recession in the early 1990s.

"This is not a problem. In fact, it is good. It is a goal of macroeconomic policy to try to keep the economy not too far from full employment.

"And some spare capacity does exist, and will do so for a little while, which is why we think underlying inflation will probably come down a little more in the period ahead.

"But it does underline the importance of adding to supply, not just to demand, over the medium term, and of maximising the productivity of the factors of production that we have, if we are to have the sort of growth that genuinely brings prosperity."

That echoes his comments on land and housing in the speech in late July, as do these comments: 

"Second, and following on the theme of potential supply, others have noted that the rate of population growth at present is the highest since the 1960s.

"On one hand, this may help alleviate capacity constraints, insofar as certain types of labour are concerned.

"On the other hand, immigrants need to house themselves and need access to various goods and services as well.

"That is, they add to demand as well as to supply.

"It follows that the demand for additional dwellings, among other things, is likely to remain strong. Corresponding effects will flow on to urban infrastructure requirements and so on.

"So the question of whether enough is being done to make the supply side of the housing sector more responsive to these demands will remain on the agenda.

"Adequate financial resources will of course also be needed.

"In that regard, the current issue is not the cost of borrowing for end buyers, which remains low, but the availability and terms of credit for developers.

"Perceptions by lenders of the riskiness of development in some cases are probably overdone just at the moment, given the strength of the underlying fundamentals on the demand side for accommodation.

"That will probably not be a permanent problem though; the more persistent difficulties look like they may be in the areas of land supply, zoning and approval.

"Third, the likely build-up in resources sector investment over the years ahead carries significant implications for the medium-term performance and structure of the economy.

"Even if a number of the proposed projects do not go ahead, the ratio of mining investment to GDP for Australia, which is already very high, will probably go higher still over the next several years.

"A sizeable share of the physical input will be sourced from abroad (through imported equipment) but the domestic spend will still be significant. So, other things equal, the investments will be expansionary for the economy.

"The financial capital to fund this build-up will mostly come from abroad.

"That is to say, absent some offsetting changes elsewhere, Australia's current account deficit could be considerably larger for some years than the 4 to 5 per cent of GDP we have seen on average for the past generation, which itself was a good deal bigger than seen in the generation before that.

"Now of course the current account position we have had turns out, contrary to what most would have expected 25 years ago, to have been manageable and sustainable.

"A temporarily larger one would probably be so as well, provided it involved a relatively modest amount of currency mismatch, and a rise in investment as opposed to a reduction in saving - and that seems to be the likely shape of things.

"In fact a temporarily sizeable current account deficit, if characterised by equity-type capital inflow, may well be optimal, because it would mean that a good deal of the risk of the projects was being shared with foreign investors, and that makes sense.

"Why would Australians alone take on all the risk of these massive projects?

"It is probably more sensible to share the risks with global capital markets and global companies.

"But these trends will take some explaining, not least to foreign and international organisations, many of which have a more traditional view of current account positions.

"Our explanation to our own citizens will also be important and not just about capital flows.

"Over time, if the resources sector is to grow as a share of the economy, as seems likely, other areas will by definition shrink.

"This does not necessarily mean that they will shrink in absolute terms, particularly given the population is growing quickly, but certainly their growth prospects would be weaker than in an alternative state of the world in which the resources sector was to remain at its historical size.

"It follows that adjustment challenges will arise, with industrial and geographical implications.

"The 'two-speed economy' debate of a few years ago was really only a preview of what we could see if the resources sector build-up goes ahead.

"A further implication is that the economy's trade patterns could end up becoming less diversified than they have been in recent years.

"Such concentration would not be unprecedented and may well be worth accepting if the returns from doing so were high enough, as it appears they might be.

"But we might also think about how to manage the risks associated with any concentration.

"The emergence of China and India is a benefit to Australia, but we stand to have a heightened exposure to anything going seriously wrong in those countries.

"The financial sector remains in pretty good shape.

"The Government does not own, and has not had to give direct support to, any financial institution.

"Australia, therefore, will be relatively free of the difficult governance and exit strategy challenges that such support is raising in some countries.

"Public finances remain in good shape, with a medium-term path for the budget back towards balance, and without the large debt burdens that will inevitably narrow the options available to governments in other countries.

"Sensible policy frameworks -both macroeconomic and microeconomic - remain in place, and they have worked.

"We remain open for trade and investment, with an exposure to Asia, which still has the most dynamic growth potential in the world over the next several decades.

"These advantages are already paying dividends. Properly exploited, they will pay many more."

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