Australian asset prices and geopolitical tensions pose key downside risks

The fight against inflation is well underway across the globe, with most central banks either approaching or having already reached the peak of their hiking cycle. Additionally, geo-political tensions and the possibility of increasing restrictions on trade between global rivals remains a key downside risk to the global outlook. Using our Global Economic Model, we consider three alternative scenarios that aim to quantify these risks.

This research report expands on the following points:

• In our first scenario, tensions between China and Taiwan rise significantly in Q1 2024. Whilst we assume a major military escalation and outright conflict are avoided, significant decoupling of trade and technology ensues.
  
• Our second scenario considers outcomes whereby core inflation slows less sharply than expected in the near term, prompting another round of central bank policy tightening. Banking sector stress flares, with concerns spreading to larger banks, as higher interest rates place pressure of financial and housing market valuations.
  
• In our third scenario, consumers across advanced economies follow the recent example of the US and run down a significant proportion of the real savings accumulated during the pandemic.