What is a soft landing from an economic crisis?

Despite inflation, a global economic slowdown and a cost-of-living crisis, in purely economic terms there appears to be scope for a so-called soft landing. This phrase has been cropping up in news reports and economic forecasts – but what does it mean?

Here we’ll unpack some of the current economic data, explain what a soft landing is and ask whether we really can expect a relatively painless exit from the economic crisis.

The fortunes of economies tend to alternate in cycles. There are periods of strong growth followed by a slowdown. Sometimes growth goes into reverse – and that’s when we get a recession. A recession is something governments and central banks really try to avoid.

A soft landing is what happens when an economy comes out of a strong growth cycle without entering a recession. This is how the financial website Investopedia defines a soft landing:

“A soft landing, in economics, is a cyclical slowdown in economic growth that avoids recession. A soft landing is the goal of a central bank when it seeks to raise interest rates just enough to stop an economy from overheating and experiencing high inflation, without causing a severe downturn.”

The latest World Economic Outlook from the International Monetary Fund (IMF) suggests that a soft landing is possible. The chart below shows a decline in growth in the global economy, with advanced economies seeing a faster drop than emerging markets and developing economies.

The IMF now expects global growth to level out at 3% for 2023 before slipping to 2.9% in 2024. However, the intervention of central banks and tighter government policies appears to have delivered a soft landing. The IMF report says: “Risks to the outlook are more balanced than they were six months ago…the likelihood of a hard landing has receded, but the balance of risks to global growth remains tilted to the downside.”

The projections of the IMF align with the latest Chief Economists Outlook, published by the World Economic Forum in September 2023. The report finds that; “recession concerns appear to have eased, but the outlook remains anaemic as the world grapples with political and financial headwinds.”

The Forum’s outlook predicts that in the year ahead the world will pass the peak of inflation and the pace of interest rate rises will slow dramatically. The outlook also suggests that politics, both domestic and international, will remain a source of economic volatility.

The big challenge faced by central banks in the current crisis has been to keep inflation under control. To keep a lid on rising inflation, central banks will often raise interest rates. This tends to reduce borrowing by businesses and consumers, slow down spending and, in theory at least, bring down prices, therefore reducing inflation.

As we have all seen in the past couple of years, raising interest rates to control inflation can also negatively impact businesses, which pay more to raise debt, and homeowners who can see their mortgage payments spiral to unmanageable levels.

According to Investopedia, raising interest rates is no guarantee of a soft landing. The website says recessions in the United States followed spikes in inflation in 1970, 1974, 1980, 1990 and 2008.

Central banks tread a very fine line when trying to ensure a soft landing. Skillful management of the economy plays a big part – but a healthy dose of good luck can be just as important in holding off the threat of a recession.