Australia is enjoying its 17th consecutive year of growth. Living standards are rising faster than in the rest of the OECD, the unemployment rate is around its lowest for 33 years and the government’s balance sheet has swung into a net asset position. These results have been underpinned by structural reforms, the proximity to dynamic Asian markets and hefty terms of trade gains. However, the long period of uninterrupted growth has pushed the economy towards capacity limits at a time when it is faced with a fresh surge in commodity prices. The external environment should remain favourable over the medium term, with the continuation of rapid growth by the Chinese and Indian economies prompting strong demand for Australia’s mineral resources. In the short term, the priority should be to curb inflationary pressures. In the longer term, the main challenge is to raise capacity faster. Current and prospective favourable conditions should be seized to adopt reforms that would allow Australia to catch up with the best performing OECD countries.