A soft landing in economics refers to a period of decelerated economic or industry growth without falling into a recession. The term originates from aviation, describing a smooth aircraft landing without incident. This controlled slowdown is essential when an economy overheats and inflation rises.
A soft landing involves slowing growth without a recession.
Central banks often intervene to achieve a soft landing, primarily through interest rate hikes, credit controls, or other monetary policies. A successful soft landing can lead to slower economic growth, reduced inflation, improved housing, consumption, and investment demand, and a stable or improved labor market.
In specific industries, a soft landing signifies decelerated growth without a downturn. For instance, an industry might experience a slight decline in revenue and output while maintaining stable operations, avoiding bankruptcies or mass layoffs. While less common in emerging markets, the term “soft landing” is still used in specialized economic discussions. A notable example is Vietnam, where in May 2024, National Assembly Delegate Ha Sy Dong attributed the country’s soft landing to Resolution 43, enacted in early 2022.
The Impact of a Soft Landing
Successful soft landings yield several positive economic impacts, often indicated by:
- Stable Economic Growth: A soft landing helps maintain positive and stable GDP growth, avoiding both overheating and recession.
- Controlled Inflation: A key objective of a soft landing is to control inflation, keeping it low and stable, typically around 2% for developed countries like the US, UK, Canada, and New Zealand. This preserves purchasing power and price stability.
- Low Unemployment: A soft-landing economy maintains low unemployment, providing stable job opportunities.
- Stable Financial Markets: The banking system and financial markets remain stable, resilient to economic shocks. This fosters business development and long-term investment.
Furthermore, a soft landing bolsters investor, business, and consumer confidence in the economy. When major economies like the US or China achieve a soft landing, it stabilizes international trade and promotes global economic development.
The Historic Soft Landing of the US Economy in 1994-1995
A prominent example of a soft landing occurred in the US between 1994 and 1995. This marks the only time since World War II that the Federal Reserve (FED) successfully engineered a soft landing during its 12 rate hike cycles.
The FED raised interest rates from 3% to 6% to slow economic growth and control inflation without triggering a recession. The US economy avoided overheating, maintaining stable growth with low unemployment and controlled inflation.
The FED achieved a soft landing in 1994-1995. Source: St. Louis FED
Several factors contributed to the FED’s success:
- Sustainable, Non-Overheated Economic Growth: The FED adjusted interest rates promptly upon observing signs of rising inflation, avoiding significant economic shocks.
- Relatively Low Inflation: Stable inflation allowed the FED to raise rates without drastically impacting the economy.
- Strong Labor Market: Low unemployment (around 5-6%) enabled rate hikes without significantly affecting the labor market.
- Balanced Monetary and Fiscal Policy: Stable US fiscal policy in the 1990s helped the economy absorb shocks without causing a recession.
- Absence of Major Economic Shocks: No major global economic shocks, such as financial crises or severe political instability, occurred in 1995, allowing the FED to maintain a relatively stable economic environment.
- Market Confidence: The FED under Alan Greenspan fostered strong market confidence. Clearly communicated and predictable rate hike policies enabled markets to prepare and adjust without panic.
In other rate hike cycles, factors like unstable labor markets and conflicting monetary policies hindered the FED’s ability to achieve a soft landing. For example, during 2007-2009, rising interest rates coupled with an unstable labor market led to a recession with unemployment reaching 10%, financial indices like the Dow Jones and S&P 500 falling over 50%, and GDP declining by 4.3%. Furthermore, unexpected FED rate hikes without prior notice triggered negative reactions like asset sell-offs and market downturns.
Soft landings require careful coordination between monetary and fiscal policies, alongside favorable economic conditions. Without this synchronization, adjustments can fail, leading to recessions or abrupt slowdowns.
