Hard Landing

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21 Aug, 2024

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Hard landing refers to a significant economic downturn or slowdown following a period of fast or rapid growth. Individuals often utilize this term to highlight the possible negative effects of overheating in an economy. Nations must prevent it to avoid a significant drop in economic growth.

This economic slowdown can result in a decrease in business and consumer spending. Moreover, it may lead to prolonged economic stagnation and even recession. Hence, economies may find it challenging to make a recovery quickly. Such a downturn can occur because of different reasons. For example, when a nation’s government takes measures to curb inflation.

Hard Landing Meaning

Hard landing refers to a scenario in economics in which a country experiences a steep decline in its economic activities after recording a boom. Governments and central banks must take certain measures to avoid a scenario so that it does not lead to stagnation or recession.
There are various causes of this type of downturn. For example, a highly aggressive monetary policy, external shocks, and substantial debt.
Two key consequences or effects of this scenario include financial stability and recession.
A vital difference between soft landing and hard landing is that the former does not cause recession.

Hard Landing In Economics Explained

Heard landing refers to an economic scenario where an economy experiences a sharp slowdown after a growth period. Countries’ governments need to take the necessary measures to prevent this kind of slowdown, as it can lead to a prolonged period of stagnation. Also, quickly recovering from this scenario can be extremely difficult for an economy.

This term actually originated from the aviation space, where it refers to an uncontrolled landing. Although it may not be an actual crash, it can lead to injury, damage, and stress. Thus, simply put, a hard landing in economics serves as a metaphor for a high-flying economy that experiences a marked economic slowdown after a duration of rapid growth.

One must note that the more dependence a nation has on easy money or fiscal stimulus, the harder it is for an economy to steer clear of a hard landing because of even minor checks concerning the expansionary policy. Hence, the longer an economy experiences a boom induced by policies implemented by the nation’s central authority or the larger a market bubble fueled by easy money becomes, the harder it is for the government’s officials to slowly withdraw their support for the expansionary policy to plan a soft landing.

When a sharp slowdown after a rapid growth period materializes, an expansionary monetary policy withdrawal results in a financial crisis, a decline in investors’ confidence, or a stock market crash. On account of implementation, response, and recognition lags with regard to macroeconomic policy, such events can lead to a recession so quickly that policymakers would not be able to set up an effective defense.

Causes

The causes of hard landing in economics are as follows:

When an economy starts demonstrating signs of vulnerability or weakness, if a central bank executes restrictive monetary policy, the effect can be severe.
If businesses and households have high debt levels, an increase in interest rates can result in bankruptcies and widespread defaults. This aggravates the slowdown in the economy.
Events that central banks have no control over, for example, natural disasters and geopolitical crises, can worsen the impact of their tightening monetary policy. This increases the chances of such an economic scenario.
Another cause of this scenario is a highly aggressive monetary policy. A central bank may increase the interest rates significantly or too quickly. As a result, the cost of borrowing surges and economic activity decreases. This results in a sudden decrease in the demand for products and services within the economy, forcing organizations to reduce their production targets and release workers.

Examples

Let us look at a few examples to understand the concept better.

Example #1

Suppose Country A recorded high economic growth for a period exceeding 12 months. The two primary reasons behind the boom were a large number of speculative investments and excessive borrowing from financial institutions. That said, a significant economic downturn followed this rapid growth period. The main cause of this slowdown was the high debt levels in the economy, which resulted in a large number of defaults.

As banks went under severe financial stress, unemployment increased, and the economy spiraled into a recession. It took the nation more than 2 years to make a recovery by implementing effective economic policies to stabilize the economy.

Example #2

On May 9, 2023, billionaire Stan Druckenmiller, said that the United States economy was on the brink of recession and predicted a hard landing. He believed a sharp economic downturn would occur because of multiple factors, such as the disruption in the country’s regional banking space and decreased retail sales. He clarified that he did not predict a situation or scenario worse than the financial crisis of 2008 and advised hedge funds to adopt a conservative approach.

Moreover, he defined the hard landing concept as a scenario in an economy where unemployment is more than 5% while corporate profits slum a minimum of 20%, and bankruptcy rises.

Impact

One can go through the following points to understand the effects of hard landing in economics.

An economy may have to experience a prolonged duration of contraction or low growth. Hence, organizations find it challenging to make a recovery.
Such an economic scenario can leave a nation’s policymakers with only a few options for stimulating the economy, especially if the interest rates are down already.
As noted above, this kind of scenario can cause a recession with reduced consumer and business spending and reduced unemployment levels.
It can cause turbulence in financial markets. Moreover, the banking sector can be under a lot of stress as households and businesses find it challenging to repay their loans.

Hard Landing vs Soft Landing

There are some key differences between soft landing and hard landing. Knowing them is imperative to clearly understand their meaning and steer clear of confusion. So, let us find out what they are.

Hard Landing	Soft Landing
In this case, central banks increase interest rates by too high a margin too soon.	Central banks increase interest rates by a low amount or gradually.
It means a sharp economic slowdown after a period of quick growth.	Soft landing refers to a slow and controlled economic slowdown.
It may lead to a recession.	A soft landing does not result in a recession.

Frequently Asked Questions (FAQs)

1. What are the signs of a hard landing?

The signs of such an economic scenario materializing can be as follows:
- A country’s central increases interest rates significantly, or it raises the rates too quickly to mitigate inflation
- Decrease in Employment
- Drop in economic growth
Decrease in borrowing

2. What is China's hard landing?

In 2015, after a quick devaluation of the Chinese yuan in addition to softening trade volumes, various observers thought that a hard landing might materialize in China. That said, currency markets stabilized, and trade volumes recovered. As a result, China did not experience this scenario. It is vital to note that if a hard landing occurs in China, it would have a significant impact on manufacturers. Moreover, it would have a negative impact from a global standpoint.

3. Can we avoid a hard landing?

Yes, governments can avoid this scenario by finding a prudent balance between loosening and tightening monetary policy to ensure a soft landing. This would help avoid abrupt economic slowdowns or excessive economic overheating.