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Banking & finance
Opinion
Nicholas Spiro
Nicholas Spiro

Macroscope | Why a soft landing for the global economy looks unlikely

  • The global economy is in a race against time. Core inflation needs to drop sharply and quickly enough for central banks to call time on their tightening campaigns
  • Unfortunately, the damage may already be done, with inflation expectations becoming entrenched

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Shoppers pass a sale sign in the window of a luxury department store in Berlin, Germany, on August 9. The European Central Bank surprised markets with an aggressive interest rate hike in July, as surging energy costs saw consumer prices in the euro zone rise 8.6 per cent in June. Photo: Bloomberg
Nicholas Spiro
Are yesterday’s inflation sceptics today’s recession-deniers? There are many intense debates in financial markets these days, but the fiercest is whether the global economy is sliding into another recession.

Since the end of last year, disagreements among investors and analysts have shifted from whether central banks must do more to curb inflationary pressures to how severe the effects of aggressive monetary tightening will be.

Optimists anticipate a “soft landing”. This occurs when interest rates rise sharply enough to bring down inflation without causing a full-blown recession. Worryingly, many of those who believe in a soft landing wrongly predicted that the surge in inflation would be temporary.

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The optimists include most of the world’s leading central banks. While the US Federal Reserve and the European Central Bank (ECB) are now members of what Bloomberg calls “the jumbo rate hike club” – the group of 70 central banks that have hiked rates by at least half a percentage point in one go this year – both institutions believe a deep recession can be averted.

Pessimists expect a “hard landing”, whereby inflation remains stubbornly high for a significant period, necessitating a contraction in output to bring prices down to an acceptable level. Having fallen behind the curve, most central banks have been forced to slam on the brakes, making a recession more likely.

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However, the one central bank that is predicting a hard landing is the Bank of England. Last week, Britain’s monetary guardian warned that inflation would exceed 13 per cent by the end of this year and was unlikely to return to the two per cent target before the end of 2024. Worse still, the UK will shortly enter a recession that will last for several quarters, the BOE’s analysis shows.
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