Soft landings, an economic history

The concept of an “economic soft landing” refers to a scenario in which an economy transitions from a period of rapid growth, often accompanied by inflation and other economic imbalances, to a more sustainable and stable growth rate without experiencing a severe recession or economic downturn. Achieving a soft landing is a delicate task for policymakers and central banks, as it involves managing economic conditions to prevent the economy from overheating while avoiding a sharp contraction.

The five most notable soft landings

1. United States (Mid-1980s):In the 1980s, the United States experienced a notable example of an economic soft landing. This period marked a successful transition from high inflation and a challenging recession to a more stable and sustainable economic environment.

   During the late 1970s and early 1980s, the U.S. economy was grappling with stagflation—a combination of stagnant economic growth and high inflation. Inflation rates had surged to double-digit levels, causing concern among policymakers and economists. To combat this inflationary pressure, the U.S. Federal Reserve, under the leadership of Chairman Paul Volcker, implemented a series of tight monetary policies.

   Volcker’s approach involved raising interest rates significantly and pursuing a policy of monetary contraction. While these measures initially led to a severe recession, they were instrumental in bringing down inflation. The aggressive monetary tightening was a critical aspect of the strategy to break the inflationary spiral and restore price stability.

   As the 1980s progressed, the economy gradually rebounded. The recession ended, and the combination of reduced inflation and improved monetary conditions set the stage for a period of sustained and more balanced economic growth. The policy actions taken by the Federal Reserve allowed for the achievement of an economic soft landing—an outcome where the economy transitioned from high inflation and recession to a more stable growth trajectory without experiencing a severe economic contraction.

   The success of the soft landing in the 1980s was attributed to the Federal Reserve’s commitment to addressing inflation. The central bank’s determination to bring down inflation expectations, even at the cost of a temporary recession, laid the groundwork for a more favorable economic environment in the years that followed. The experience of the 1980s also influenced subsequent monetary policy strategies and reinforced the importance of central banks’ credibility in managing inflation.

   This period highlights the complexities of achieving a soft landing and the trade-offs that policymakers often face. The U.S. soft landing in the 1980s demonstrated the potential benefits of decisive and targeted policy actions to control inflation, even when those actions lead to short-term economic challenges. It serves as a case study of how effective monetary policy can contribute to restoring stability and setting the stage for more sustainable growth in the long term.

2. Australia (Late 1980s):In the 1980s, Australia experienced a successful example of an economic soft landing characterized by a transition from a period of rapid economic growth and rising inflation to a more controlled and sustainable growth trajectory.

   During this time, Australia was riding a wave of economic expansion driven by a mining boom, favorable terms of trade, and increased international demand for its resources. While the economic growth was beneficial, it also brought concerns of potential overheating and inflationary pressures.

   To address these concerns and ensure long-term stability, the Reserve Bank of Australia (RBA) undertook a series of measures to manage the economy’s trajectory. The RBA recognized the importance of preventing the economy from overheating and inflation from becoming entrenched.

   One of the key tools used by the RBA was monetary policy. The central bank implemented a series of interest rate increases to cool down economic activity and reduce inflationary pressures. The higher interest rates had a moderating effect on consumer spending, business investment, and borrowing, which in turn helped to curb inflation.

   External factors also played a role in achieving the soft landing. Falling commodity prices, particularly for Australia’s key export goods like minerals and agricultural products, contributed to easing the pressure on inflation. Additionally, global economic conditions influenced demand for Australian exports and thus affected the overall pace of economic growth.

   The combination of the RBA’s monetary policy actions and external factors worked in tandem to bring about a successful soft landing. The Australian economy transitioned from a period of rapid expansion to a more sustainable growth rate, avoiding a severe recession.

   The RBA’s approach demonstrated the importance of proactive policy management in maintaining economic stability. By taking timely action to prevent excessive inflation and overheating, the central bank helped to achieve a controlled deceleration of the economy without causing a major economic downturn.

   The Australian soft landing in the 1980s serves as an example of how careful policy decisions, guided by a commitment to stability and the management of inflation, can contribute to achieving a smoother economic transition. It underscores the significance of central banks’ role in balancing growth and inflation to ensure sustainable economic development.

3. China (Early 2010s)In the early 2010s, China achieved a notable example of an economic soft landing—a successful transition from a period of rapid economic growth to a more moderate and sustainable growth trajectory.

   During the previous decade, China had experienced robust economic expansion, with double-digit growth rates fueled by export-led manufacturing, infrastructure investment, and a booming real estate sector. However, concerns began to emerge about the sustainability of this growth model, potential asset bubbles, and the risk of inflation.

   To address these challenges and ensure long-term stability, Chinese authorities initiated a series of measures aimed at guiding the economy toward a softer landing:

   1. Monetary Policy Tightening: The People’s Bank of China (PBOC), China’s central bank, implemented tighter monetary policies to curb excessive lending and credit expansion. Higher interest rates and increased reserve requirements for banks were used to control liquidity and reduce the risk of overheating.
   2. Real Estate Controls: Given concerns about a potential housing bubble, the Chinese government introduced measures to cool down the real estate market. These included restrictions on property purchases, increased down payments, and limits on the number of homes that individuals could own.
   3. Investment Rebalancing: China aimed to shift its growth model from being heavily reliant on exports and investment to one that is more consumption-driven. This involved encouraging domestic consumption, fostering innovation, and reducing reliance on resource-intensive industries.
   4. Structural Reforms: The Chinese leadership recognized the need for structural reforms to address imbalances in the economy. Reforms targeted areas such as state-owned enterprises, financial sector liberalization, and environmental protection.
   5. External Factors: Global economic conditions, including a slowdown in demand from key trading partners, also contributed to China’s more moderate growth.

   These policy efforts and external factors collectively contributed to China’s soft landing in the early 2010s. While the growth rate moderated from the double-digit figures of the past, China’s economy continued to expand at a more sustainable pace. This transition was important for avoiding potential risks associated with excessive credit growth, overinvestment, and asset bubbles.

   China’s soft landing demonstrated the ability of policymakers to steer the economy toward more balanced and sustainable growth. By focusing on prudent monetary policies, addressing imbalances, and promoting structural reforms, China managed to achieve a transition that maintained economic stability while also fostering the conditions for longer-term development.

   The experience of China’s soft landing in the 2010s highlighted the challenges and benefits of managing growth in an economy that had experienced rapid expansion. It underscored the importance of proactive policy measures to maintain stability, manage inflation, and ensure sustainable economic progress.

4. Canada (Late 2010s):In the late 2010s, Canada’s economy encountered a situation where the robust growth of its housing market and increased household debt raised concerns. While the housing sector was contributing to overall economic growth, there were apprehensions about the potential risks of elevated debt levels and the emergence of a housing bubble.

   To address these concerns and maintain financial stability, the Bank of Canada (BoC) initiated a series of measures to guide the economy toward a more sustainable path. One of the key strategies employed by the BoC was the gradual increase of interest rates. By gradually raising interest rates, the central bank aimed to moderate borrowing and spending while also ensuring that inflation remained in check.

   Additionally, the Canadian government implemented measures targeting potential vulnerabilities in the housing market. For instance, mortgage stress tests were introduced, requiring borrowers to demonstrate their ability to manage mortgage payments even at higher interest rates. This move aimed to prevent borrowers from taking on excessive debt levels that might become unsustainable as interest rates rose.

   External factors, such as global trade tensions and uncertainty, also played a role in shaping Canada’s economic trajectory during this period. These external circumstances influenced demand for Canadian exports and consequently impacted overall economic growth.

   Throughout this process, the Bank of Canada emphasized the importance of striking a balance between fostering economic growth and maintaining financial stability. The central bank’s transparent communication about its policy decisions helped guide market participants and the general public through the economic transition.

   As a result of these policy efforts and external considerations, Canada achieved a soft landing. The housing market cooled down, household debt stabilized, and economic growth continued at a more controlled pace. This outcome demonstrated the potential benefits of proactive and clear policy measures to manage potential economic vulnerabilities.

   Canada’s experience in achieving a soft landing underscored the challenges that policymakers face when managing growth in the presence of potential imbalances. By implementing gradual interest rate increases and addressing housing market risks, the central bank navigated a transition that balanced economic growth with financial stability, ultimately contributing to a more sustainable economic trajectory.

5. Sweden (Early 1990s):In the 1990s, Sweden experienced a notable example of an economic soft landing—a successful transition from a period of economic challenges marked by a banking crisis and a property bubble to a more stable and sustainable growth trajectory.

   During this time, Sweden faced severe economic difficulties due to a combination of factors, including a burst property bubble and a banking crisis. These issues led to significant challenges, including a recession, declining property prices, and a strain on the financial system.

   To address these challenges and restore economic stability, Swedish authorities undertook a series of measures to guide the economy through a soft landing:

   The government and central bank implemented policies to stabilize the financial sector, restore investor confidence, and address the root causes of the crisis. These actions included recapitalizing banks, providing liquidity support, and implementing measures to strengthen the banking system’s resilience.

   Structural reforms were introduced to address economic imbalances. These reforms aimed to increase the flexibility of labor markets, promote competition, and encourage fiscal discipline. These structural adjustments were crucial in promoting economic resilience and sustainability.

   Efforts were made to improve public finances and reduce budget deficits. These fiscal reforms aimed to restore investor confidence, support economic stability, and pave the way for sustainable growth.

   The Swedish currency, the krona, was allowed to float freely, which helped the country adapt to changing economic conditions and regain competitiveness.

   Through these coordinated policy actions, Sweden managed to stabilize its economy and achieve a soft landing. The banking crisis was addressed, property markets stabilized, and economic growth gradually resumed.

   Sweden’s experience of achieving a soft landing in the 1990s demonstrated the importance of proactive and comprehensive policy responses in navigating economic challenges. By taking decisive measures to stabilize the financial sector, promote fiscal discipline, and implement structural reforms, Swedish authorities were able to guide the economy toward a more stable and sustainable growth path.

   This episode highlighted the complexities of managing economic transitions, particularly in the face of significant disruptions. It underscored the potential benefits of coordinated efforts among policymakers, central banks, and other relevant institutions to restore stability and lay the foundation for long-term economic recovery.

It’s important to note that achieving a soft landing is often a complex and delicate process that depends on various factors, including the effectiveness of policy measures, external economic conditions, and the state of the global economy. While these examples demonstrate successful instances of soft landings, there have been cases where economies faced challenges in achieving a smooth transition, leading to more turbulent economic periods.