What is a soft landing?

What is a soft landing?

A “soft landing” is an economic term used to describe a scenario in which an economy transitions from a period of rapid economic growth, often characterized by high inflation and potentially overheating, to a more sustainable and stable growth path without experiencing a severe economic downturn or recession. In essence, it refers to a controlled or gradual slowdown in economic activity to avoid the negative consequences of an abrupt economic contraction.

Key characteristics of a soft landing include:

1. Controlled Inflation: During a soft landing, efforts are made to curb inflationary pressures and keep inflation at a moderate level. This is typically achieved through various monetary policy tools, such as interest rate hikes, which can slow down economic growth and reduce inflationary pressures.

2. Moderate Growth: Economic growth slows down to a more sustainable pace, but it does not turn negative. The objective is to bring economic growth to a level that can be maintained over the long term without causing imbalances.

3. Stable Employment: The labor market remains relatively stable, with unemployment rates remaining low or only experiencing mild increases. A soft landing aims to prevent a sudden spike in unemployment.

4. Prudent Economic Policies: Policymakers often implement measures to manage the transition to a soft landing, such as fiscal and monetary policies that promote economic stability.

5. Avoiding Asset Bubbles: Soft landings also seek to prevent the formation of asset bubbles, such as real estate or stock market bubbles, which can lead to financial instability when they burst.

Soft landings are desirable because they aim to strike a balance between preventing economic overheating and avoiding the negative consequences of a recession. Achieving a soft landing can be challenging for policymakers, as it requires careful timing and the use of economic tools to manage the economy’s transition from a period of rapid growth to more sustainable growth.

Conversely, a “hard landing” refers to a situation where an economy transitions abruptly from rapid growth to a recession, often accompanied by a sharp increase in unemployment, a collapse of asset prices, and financial instability. Policymakers aim to avoid hard landings because of the potentially severe economic and social consequences they can entail.

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