In the years immediately following the historic financial explosion of 2008, the IMF, the OECD and the other major international organizations were optimistic. Semester after semester and year after year, reality called into question the systematically long growth forecasts. This trend has recently reversed: the energy crisis has hit European growth, starting with Germany, but without bringing the bloc to its knees as feared. With all caution – the economy is always a story in real time, and if the last few years have taught anything it is that anything is possible – macro players are showing unprecedented resilience to rising interest rates. The steepest in four decades.
The economic world, steeped in pessimism, pushed the soft landing hypothesis—which depicted an economy capable of absorbing inflation and the escalation of the price of money without suffering a major recession—into the domain of the most staunch optimists. However, months later, this niche theory is just one step away from becoming something tangible. Growth is slowing on both sides of the Atlantic. But wait. This is largely thanks to a labor market that is much more dynamic than ever imagined and household consumption that is weathering the storm with flying colors in an environment of sharply rising credit prices.
If you had to choose a single word to describe the economy in 2023, it would undoubtedly be resistance. Inflation is approaching reasonable levels again and the first interest rate cuts by the US Federal Reserve and the European Central Bank (ECB) allow us to anticipate a significantly more favorable economic horizon for the coming months. The reality is no picnic, but in short, it is far – very far – from the “blood, sweat and tears” that was suggested.
“Everything indicates that we are heading for a soft landing, a scenario that the markets have also clearly seen in recent weeks,” says Xosé Carlos Arias, professor of applied economics at the University of Vigo. “There is a feeling that we are moving closer to the 2% inflation target and that fears of a price spiral are increasing.” Everything is still in the ever-swampy territory of “it seems” because the economy has become a minefield for analysis. “But one thing is clear: restrictive monetary policy has not led to a severe recession, and that is no comparison to the crisis.” [del petróleo] “The story of the 1970s has been exaggerated,” Arias counters.
Mitigating agents
“We can still see some quarters of stagnation or slight decline, especially in the US, but not the great recession that was feared,” adds Leopoldo Torralba, deputy chief economist at Arcano Research, one of the companies that was most right in his predictions. Current forecasts. “Historical experience shows that it was difficult to avoid a recession when interest rates rose so sharply. But this was a very special crisis: unlike other episodes in the past, this time there were no major imbalances and there were many buffers to absorb the shock.”
These mitigating factors can essentially be summarized into three: the accumulated savings that have enabled many families to maintain their consumption; private debt (households and companies) at an appropriate level, which made it possible to avoid a financial explosion like 15 years ago; and a much better prepared bank with measures to deal with a default rate that has not increased as feared.
“It was not a crisis of demand, but of supply, with factors that we believed would correct themselves,” explains Torralba. For the coming months, this economist predicts an increase in household purchasing power “earlier than expected as inflation continues to normalize” and the first interest rate cuts in the US and the Eurozone from the second or third quarter of this year. Result: “Demand will continue and the economy will endure.”
The Fed avoids claiming victory
In his memoirs, Alan Greenspan, chairman of the Federal Reserve from 1987 to 2006, called one of his greatest achievements the long-awaited soft landing of the 1994 rate hikes, a term that comes from the space race between the United States and the Soviet Union in the 1970s years that had not been used at the Fed until then, he explained. Current President Jerome Powell has been trying to emulate him for more than a year and a half.
After many months in which recession forecasts were delayed but remained the central scenario, Powell began to see success a few months ago. He emphasized that in the United States the decline in inflation has occurred without a significant increase in unemployment, which remains below 4%. The Federal Reserve's Monetary Policy Committee members' forecasts for 2024, released in December, anticipate the desired scenario: growth of 1.4%, an unemployment rate of 4.1% and inflation close to the 2% target.
However, Powell is reluctant to claim victory. This Wednesday, Tom Barkin, president of the Richmond Federal Reserve, used this metaphor to highlight the risks. “A soft landing is increasingly conceivable, but by no means inevitable. I see four risks. The US economy could run out of fuel. Unexpected turbulence could occur. Inflation could stabilize at a cruising level above our 2% target. And the landing could be delayed if the U.S. economy continues to underperform,” he noted in a speech in Raleigh, North Carolina.
The risk of running out of fuel… or flying to the wrong airport
With the fuel shortage, Barkin points to the possibility that the delayed effects of monetary tightening are taking their toll and that the pool of savings accumulated during the pandemic is no longer feeding demand. Turbulence can be geopolitical, financial or other. In his opinion, it would be a mistake to “choose the wrong airport” and think that it would be okay to land at 3% inflation.
However, both in the USA and – especially – in Europe, criticism of the speed at which interest rates have risen is growing. Perhaps, many say, too quickly in the face of an inflationary phenomenon that has far more supply than demand factors behind it. The ECB defends itself: “The latest inflation data from the Eurozone are good and in line with expectations, and the economy is following the script of a soft landing,” said President Christine Lagarde’s entourage at the beginning of November. Inflation in the euro zone ended December at 2.9%, slightly higher than November but also below analysts' expectations. And above all: light years away from the worst days of the price crisis.
“The airport is on the horizon. But landing a plane is not easy, especially when the sky is cloudy and headwinds and tailwinds can affect the course. It’s easy to oversteer and do too much or to understeer and do too little,” Barkin said. And he warned: “There is no autopilot.”
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