What is a Hard Landing? Investing Explained

In this series, we bust the jargon and explain a popular investing term or theme. Here it’s Hard Landing: 

Why the use of aviation industry jargon? 

Because there is no better way to describe a particular set of economic circumstances. 

The high-speed, hard landing of a plane provokes stress, and maybe also immediate and longer-term damage. 

An economy is said to be experiencing such a landing if – as the consequence of action by its central bank – growth slows abruptly and painfully and a recession ensues. The UK’s central bank is the Bank of England. The US has the Federal Reserve (the Fed) and the EU has the European Central Bank (ECB). 

Aviation industry jargon: There is no better way to describe a particular set of economic circumstances

What kind of central bank action are we talking about? 

Monetary tightening in which a bank raises interest rates to suppress inflationary pressures, but goes too far and too fast in the process. 

The aim of the exercise is to leave consumers with less to spend, and make businesses more likely to make workers redundant than employ more of them at better wages. But the result may be recession, rather than a gradual slowdown. 

When the Bank of England began to increase rates last December the base rate stood at 0.1 per cent. It is now 3.5 per cent after another increase this week. Inflation has eased to 10.7 per cent against the Bank’s target of 2 per cent. 

Can the Bank of England avoid a hard landing? 

There is a growing conviction, especially in the wake of this week’s rate rise, that the UK is headed for a hard landing in 2023, with the Bank itself suggesting that we should buckle up in preparation for a downturn.

Although the UK economy grew by more than expected in October, the bigger picture is less benign, with output falling over the past quarter. 

Also, there is only so much that the Bank or any other central bank can do in the face of global macro factors. 

The International Monetary Fund (IMF) predicts a third of the world’s economies will have tumbled into recession by the end of this year or in 2023, thanks to war in Ukraine, soaring gas prices and Covid aftershocks. 

Has a central bank ever brought about a soft landing?

In a soft landing, the central bank contrives to raise interest rates by just enough to curb inflation, while avoiding recession. 

Central bankers aim for soft landings of course, but easing an economy on to the runway without a sharp bump can be extremely tricky, as they are now finding out. 

There is only one obvious instance of a soft landing, engineered in 1994 by Alan Greenspan, then the chairman of the Fed. Interest rates were doubled to 6 per cent to reduce stock market exuberance and to decelerate economic growth. The attempt was successful and a recession averted. 

Can the current Fed chairman repeat Greenspan’s coup? 

Jerome Powell, the Fed’s chairman, began to increase rates in March, having previously regarded signs of surging inflation as ‘transitory’. Powell regards the chance of a soft landing as ‘very plausible’ and he is not alone in this view. Many, however, believe that the Fed did not act quickly enough. 

Economist Nouriel Roubini is predicting a severe recession. But let’s remember that Roubini is known as Dr Doom. 

This post first appeared on Dailymail.co.uk