The US government could cause the next major outbreak of panic in global markets, as the world's biggest economy's debt piles are rising, says Rothschild Wealth Management.

Rothschild says that measures kicking in next year to tackle government spending risk pushing the economy into sharp recession.

The firm predicts that a combination of lower stimulus spending and the end of time-limited tax cuts could reduce the size of US GDP by between 2 and 5 per cent next year.

That prospect would pose an imminent threat for an already difficult investment outlook. The US has had superior economic growth compared with most other mature economies and has been the preferred developed equity market for many investors.

Because of the presidential election in November this year, Rothschild believes that investor confidence could be severely dented, as there will be little bipartisan action to get to grips with the country's "fiscal cliff".

More political impasse?

The US budget deficit is estimated to be around $1.1 trillion in this fiscal year, a drop on 2011 but still higher than any time between 1947 and 2008.

On top of this, the debt ceiling itself will need to be raised once again and could lead to a logjam in Washington and further downgrades to the country's credit rating.

Accordingly, the wealth manager does not see US treasuries as a good safe haven investment, as the low yields (1.75 per cent on 10-year bonds at the time of publication) do not compensate for the risks investors are taking.

In its latest asset allocation update, Rothschild says it is avoiding government bond exposure and instead opting for opportunities in investment grade corporate bonds, high yield and emerging market debt.

While current attractive valuations make the firm keen to move to a neutral position in equities, the firm remains cautious for the time being given the macro risks.