A hard landing refers to a marked economic slowdown or downturn following a period of rapid growth. Originating from aviation terminology, a hard landing is a high-speed descent that, while not an actual crash, can cause stress, potential damage, and possible injury. In economic terms, it signifies an abrupt halt to strong economic growth, often triggered by stringent monetary policies aimed at controlling inflation. Economies experiencing a hard landing may slip into stagnation or even a recession.
Key Takeaways
Understanding this phenomenon is vital for stakeholders and policy-makers to anticipate and mitigate its impacts. It highlights the unpredictability and interconnectedness of economic cycles, urging preparedness in navigating through potential financial turbulence.
Comprehending Hard Landings
A hard landing contrasts sharply with a soft landing, which is the more favorable scenario sought by economic policymakers. For a technical soft landing, government officials and central banks gradually dial back on expansionary fiscal and monetary policies. This aims to manage inflation without sacrificing jobs or causing undue economic hardship. However, in economies deeply dependent on fiscal stimulus or easy monetary conditions, even minor contractions in expansionary policies can cause a hard landing.
Prolonged economic booms or market bubbles fed by expansionary policies make it challenging to gradually withdraw support without instigating economic contractions. The result is often a hard landing, potentially triggering stock market crashes, financial crises, or drops in investor confidence. Given the delays in recognizing, responding, and implementing macroeconomic policy changes, these events can spiral into recessions too quickly for policymakers to counter effectively.
For instance, the Federal Reserve has historically raised interest rates at a pace that proved intolerable for the market, leading to economic slowdowns or recessions. The 2007 hard landing is a notable example, where decisions to tighten monetary policy to cool the housing market led to the Great Recession. Although the scale of the speculative bubble made a soft landing implausible, the consequences were severe.
China’s Frequently Foreseen Hard Landing
China, known for its high GDP growth and rapid economic development, is often cited as susceptible to a hard landing. Extensive local government debt and steep property prices in major cities are key risk factors. The term surfaced notably in late 2015, reflected in the yuan’s rapid devaluation and weakening trade volumes. Predictions of a hard landing abounded, though trade volumes and currency markets eventually stabilized. Debates reemerged in 2019 with the crackdown on shadow finance and speculation on the subsequent impacts on China’s businesses, growth, and employment. Despite repeated forecasts, China has thus far avoided a hard landing, unlike several western economies which have experienced multiple downturns.
Related Terms: soft landing, monetary policy, economic stimulus, recession, implementation lag, recognition lag
References
- Business Insider. “These Economic ‘Swans’ Could Rock the Global Markets”.
