Just as global markets staggered for a third day this week after the technical fault-driven shock of a 900-point fall in the Dow, the Reserve Bank has highlighted the risks still coming from offshore.

In its second Statement of Monetary Policy, issued this morning, the RBA lifted its forecasts for growth and inflation out to 2012, but reminded us that “the risks that are getting most attention at present are some specific ones on the downside”.

It pointed out that we could have a re-run of 2008 and the near collapse of confidence after the failure of Lehman Brothers, if those fears about fiscal imbalances, especially in Europe, took hold.

“Australia’s good fundamentals would help, but the experience of late 2008 suggests that the willingness to invest abroad declines in such circumstances,” the RBA said.

All the risks highlighted on the downside are offshore and relate to either the fiscal and sovereign debt crises in Europe, or the likelihood of rising inflation in Asia causing a rise in interest rates and a crimping in demand for Australian minerals and other resources.

While the bank regularly highlights the risks on the upside and downside to the Australian economy in each Monetary Policy Statement, the near collapse of Greece’s financial standing, worries about Spain, the UK, Portugal and other Europe economies and the rising level of inflationary pressures, especially in China, have been major factors behind the renewed bout of fear and loathing in financial markets.

Among the risks to the downside “getting most attention at present” the bank, one was “the challenge that rising public debt ratios in a number of advanced economies pose for the global economy”.

“The central forecast is for a gradual fiscal consolidation that results in some dampening effect on global growth in the medium term. However, investors might become increasingly concerned about the medium term fiscal situation, resulting in renewed high levels of risk aversion. If this were to occur abruptly it could prompt another period of global economic weakness and falls in commodity prices. The other major international risk for Australia is that rising inflation in Asia prompts a significant tightening of financial policies in the region, including in China. This could result in a significant slowing in activity in that region in the medium term, especially in sectors such as construction. This would lead to a reduction in the demand for steel-related and energy commodities and a reassessment of prospects for the resources sector in Australia.”

On the upside risks, the RBA singled out inflationary pressures if the expected surge in national income and our terms of trade prove too much.

As forecast in yesterday’s Crikey, the RBA has lifted its forecasts for economic growth, inflation and our terms of trade.

The bank sees the economy growing at a faster-than-expected pace over the next two years, with inflation also expected to rise faster than previous estimates.

The bank says the reduced fiscal stimulus, a possible surge in commodity prices and a construction boom could accelerate growth and inflation at an even faster than predicted pace. The terms of trade are forecast to go past their 2008 level this year, peak next year and then ease in 2012.

It said gross domestic product (GDP) is now expected to be running about 3.75% in the year to June 2011, up from the 3.5% forecast in in February and then rising to about 4% by the end of 2012.

CPI inflation is predicted to grow at 3.25% in the year to June 2010, up from its previous forecast of 3%, then ease in the second half of this year to 3%, which is higher than the 2.5% forecast in February.

And, buried away in the report is a comment that will surprise: the bank said that: “The rise in the terms of trade is expected to increase domestic incomes by around 4 per cent this year (although the boost to national income — the income accruing to Australian residents — will be smaller) and nominal GDP is expected to rise by close to 10 per cent over 2010.”

Who would have thought the central bank or anyone would be talking about economic growth approaching double-digit pace in the Australian economy by any measure?