Prolonged ultra-low interest rates are surfacing as one of many big threats to the world’s recovery from the Great Recession.

The European Union’s financial risk watchdog warned this week that the property markets of eight European nations, including the United Kingdom, are at risk of overheating because of low rates, and that the “negative spillovers” could hurt others.

The EU’s top central banker Mario Draghi, head of the European Systemic Risk Board, is the latest to recognise the distortive effects of low rates. Photo: Getty

Austria, Belgium, Britain, Denmark, Finland, Luxembourg, the Netherlands and Sweden face a medium-term risk from either property price bubbles or too much mortgage debt, according to the European Systemic Risk Board. Sound familiar?

The EU was slow to come to this conclusion. Many in Australia, including Dr Stephen Anthony, have been worrying for years about the distortions caused by the unprecedented expansion of monetary policy.

Dr Anthony, chief economist at Industry Super Australia, said low rates and massive bond buying by central banks is “rusting” the developed world, Australia included, by driving money into yield assets such as real estate, while growth assets starve.

“In effect, we see a capital strike,” the former Treasury analyst told The New Daily.

Central banks should reverse out of buying financial securities (‘quantitative easing’) and put a freeze on rate cuts, and governments should switch focus to fiscal spending on “smart” public infrastructure that boosts productivity and creates jobs, Dr Anthony said.

Another economist, William White, a Canadian famous for predicting the financial crisis, warned in September that the world’s economic predicament is “arguably more fraught with danger” than just before 2007 because super-loose monetary policy “has dug the hole still deeper”.

Global shocks carry big risks for Australia, whatever the cause. The Reserve Bank estimated in 2008 that “international factors” account for more than half the nation’s fluctuations in domestic output.

For now, the eyes of the world are fixed on Donald Trump. Can he make the US the driver of global growth again? But perhaps we should be paying equal attention to the US Federal Reserve, which could smash emerging economies by hiking rates too fast.

Hyperinflation in Venezuela, OPEC’s decision to cut oil production, the fallout from India’s removal of large bank notes from circulation, and the upcoming elections in France and Austria have also grabbed headlines.

Sunday’s referendum in Italy, a potential Brexit, could be a bigger concern. And then there’s China, the sleeping dragon.

An Italian ‘Brexit’

The Italian referendum on Sunday, December 4 is possibly the biggest European political event of the year.

A vote against Renzi’s referendum could be a de facto vote for an Italian-style Brexit, with all the uncertainty that would bring. Photo: Getty

Prime Minister Matteo Renzi has sworn to resign if the nation votes ‘no’, so any Brexit-style upset could shake markets, hurt Italy’s already feeble banks (which are weighed down by bad debts), and plunge the nation into political instability.

Its purpose is constitutional reform. A ‘yes’ vote would weaken the power of the Italian parliament’s upper house, which can currently unseat the government and make legislating near impossible.

If the referendum is defeated and Mr Renzi quits, many believe the left-wing Five Star Movement, which has promised a referendum on leaving the EU, will sweep to power.

Prominent Australian economist Saul Eslake told The New Daily a ‘no’ vote could prevent Mr Renzi from bailing out the banks, and trigger a bank run.

“If there are serious concerns about political stability in Italy, then Italian banks could see outflows of deposits and have difficulty rolling over their wholesale liabilities because people will want to reduce their exposure to Italy, including Italians themselves.”

Fallout from US rate hikes

While the world scrutinises Donald Trump, it may want to keep a close eye on central bank boss Janet Yellen too.

A string of cuts by Federal Reserve chair Janet Yellen could trigger a crisis in emerging markets, economist warns. Photo: AAP

The widespread expectation that the Federal Reserve will lift rates in December has already sent money scurrying back to the US.

If the bank continues to hike rates into 2017, then more and more capital could be sucked out of emerging economies, triggering financial crises that ripple around the world, Mr Eslake warned.

The Latin American debt crisis of the 1980s, the Mexican crisis of 1994 and the Asian crisis of 1998 were all preceded by rising US rates, he said.

“If US rates and the US dollar go up, then any number of companies and possibly governments in emerging markets could be facing greater financial difficulties.”

The sleeping Chinese debt dragon

Chinese banks are increasingly at risk of ‘wholesale runs’, where market freezes ripple through the world, Mr Eslake said.

Chinese banks are propping up economic growth with wholesale debt. Photo: AAP

To fund their businesses, China’s banks have been replacing stable customer deposits with riskier loans from the wholesale market (by selling debt securities to other banks, pension funds and investment funds).

This makes the Chinese banking sector far more vulnerable to contagion than it was during the global crisis.

“At some point, if history is any guide, this could turn nasty. And if it does, because China is such an important part of the world these days, that would have global consequences.”

Australia’s ‘short-termism’

Like many developed economies, Australia seems to be suffering the ill-effects of overly-loose monetary policy, which may impede recovery and heighten its vulnerability to contagion.

Business investment is falling, which means we are ill-prepared for the future, and vulnerable to shocks. Photo: AAP

Thursday brought bad news, with business investment down again and forecast to fall further in 2016-17.

New investment in buildings and structure, and equipment plant and machinery, fell by 4.0 per cent in the September quarter, a decrease of 13.7 per cent on the year before, and 35 per cent since the mid-2012 peak, the Australian Bureau of Statistics reported.

Industry Super Australia’s Dr Anthony said low investment is another symptom of ultra-low rates, which encourage big companies to “cannibalise” themselves with dividends and share buybacks, rather than re-investing in long-term growth.