The factors that have made the RBA more optimistic are also the biggest risks for the economy

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We’ve heard a lot from the Reserve Bank of Australia (RBA) over the past two weeks, with all of the commentary expressing cautious optimism over where the Australian economy is heading.

Unsurprisingly, that theme continued today with the release of the minutes of the bank’s February monetary policy meeting, with the bank expressing the view that it is more than happy with interest rate settings, and the outlook for the economy, right now.

Here’s what the minutes said in relation to the global economy:

In considering the stance of monetary policy, members viewed the near-term prospects for global growth as being more positive, although recognised the risks from policy uncertainty in the medium term. Stronger growth had contributed to higher inflationary pressures, including higher commodity prices, which had implications for the future stance of monetary policy in the advanced economies in coming years. Long-term bond yields had moved higher in many advanced economies.

And, as a result of that optimism, what was said in relation to the Australian economy:

Domestically, the economy was continuing its transition following the end of the mining investment boom. The fall in GDP in the September quarter had reflected some temporary factors. Looking forward, resource exports were expected to make a significant contribution to growth over the forecast period and the drag on growth from falling mining investment was expected to wane.

Essentially, the bank’s optimism towards the near-term outlook has been driven by an improvement in the global economy, led by the United States and China, the world’s largest individual economies.

That, in turn, is expected to flow through to the Australian economy, helping to lift growth and inflation in the years ahead.

Happy days.

However, while the RBA is clearly content with where things currently sit, it also warned that there were risks that could derail Australia’s expected economic recovery over the medium to longer term.

And they just happened to be the same factors that have helped to bolster confidence recently: the US and China.

Here’s the geopolitical risks it sees attached to US foreign policy (our emphasis in bold):

The new US administration’s proposed fiscal policy was expected to provide additional support to economic activity in the United States. However, members noted that the new US administration might introduce more restrictive policies on trade and immigration, which would pose significant downside risks to the forecast for global growth.

And, when it comes to China, how continued debt accumulation — something that helped to power the nation’s economic recovery in the final nine months of 2016 — has also increased medium-term financial stability risks:

Total social financing had increased at almost double the pace of GDP over 2016. This had supported the economy in the near term, but implied a further rise in China’s debt-to-income ratio, which heightened the risks to Chinese growth in the medium term. Members noted that developments in China continued to be one of the main sources of uncertainty for the Australian economy.

Two risks from two major economies, and for very different reasons.

And while neither may eventuate, it would take only one such scenario, let alone two, to see optimism towards the global economy quickly swing to pessimism.

So while the developments in the Australian economy will play an important role in determining the outlook for interest rates, it’s what happens abroad, as has been the case countless times in the past, that will ultimately determine what will happen next.