Reserve Bank says fresh global recession remains a risk

Senior Reserve Bank official Guy Debelle has warned there remains a risk of a double-dip recession, although quantifying just how likely it is remains difficult.

The RBA deputy governor gave the warning following a speech this morning, said the situation was difficult for government and policy makers to read.

“I think it’s a risk, but it’s a somewhat unquantifiable risk,” Debelle said in response to a journalist’s question about the potential for another recession.

“It’s difficult to take into account risk and uncertainty in structure in balance sheets and the like, it’s difficult to take risk and uncertainty into account when conducting policy.”

“In policy you have to take account of the modal events rather than the tail events, which means almost certainly you’re going to be wrong. You’re just not sure in which direction you’re going to be wrong.”

Debelle was speaking just a day after US Federal Reserve chairman Ben Bernanke said that the US central bank remained ready to provide the struggling US economy with further stimulus is required.

Fears that the US could crash into a fresh recession have weighed heavily on sharemarkets in recent months, and appear to be acting as another drag on consumer and business confidence.

Debelle also gave a speech focussing on risk and uncertainty in the financial world after the GFC, and called for regulators to look to restrain the level of debt in the global financial system.

“Leverage played the major role in translating events which would have been somewhat damaging, but survivable, into events which were fatal.”

He also argued banks and other financial institutions may have misread the potentially disastrous problems that debt can cause as strong economic growth continued through the 1990s and 2000s.

“The decline in volatility led many to conclude that a new, more stable, regime had been established.”