US banking risks loom large in budget’s global outlook

‘We seem to be sort of muddling along, both in the US and Europe.’

Chief investment officer at Atlas Funds Management, Hugh Dive

Another possible risk flagged by Treasury is that global inflation doesn’t cool off as quickly as financial markets expect.

Curtayne says markets are currently betting US interest rates will be falling by the end of this year, but higher inflation could force more interest rate hikes, once again causing financial instability.

Some market watchers also warn that we have not yet seen the full economic effects of higher interest rates, which can take more than a year to work their way through an economy.

AMP chief economist Shane Oliver highlights the risk that high interest could spark a recession, including in the US, where big interest rate rises from the US Federal Reserve have in the past often caused financial busts.

“History tells us that financial crises of some form or another often result from Fed tightening, and that results in additional weakness in US growth, often recessions. There’s a long track record of that,” he says.

Treasury also acknowledges this possibility, saying: “There remains an elevated risk of recession across major advanced economies.”

Despite repeated warnings of the potential for recessions in the US and Europe, however, so far the world economy has proven to be more resilient to higher rates and inflation than many thought.

Chief investment officer at Atlas Funds Management, Hugh Dive, concedes a potential US recession is a key risk, but says this looks less likely now than it did six months ago. “We seem to be sort of muddling along, both in the US and Europe,” he says.

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