The recession everyone expected hasn’t arrived yet

When central banks around the world began raising interest rates last year to slow the economy and thus stop rising prices, many expected that the economies of most advanced countries would not not to a slight slowdown, but which would have resulted in a recession. That is, we expected a situation of deep economic crisis in which many companies would fall into difficulty, in the worst case they would go bankrupt, people would start to lose their jobs and unemployment would increase.

If we take the largest Western economies, such as the United States and Europe, we can say that so far this expectation has not come true, although with differences between the two: the economy is doing well overall (even if that of the United States is in good health). much better) and unemployment is at a historically low level. Most international observers are now beginning to hope that what we know about economics has happened soft landing, a soft landing from a world of very high inflation to a world of lower inflation, but without the shock of a severe recession and a sharp increase in unemployment. The opposite scenario is what we call difficult landingthat is, a crash of the economy in an attempt by central banks to stop rising prices.

Over the past year and a half, the central banks of the United States and the European Union (i.e. the Federal Reserve and the European Central Bank) have steadily and rapidly increased interest rates. benchmark interest, precisely to combat unprecedented inflation. decades and which especially penalized people with low incomes. The FED increased them from 0.5% in March 2022 to 5.5% today and the ECB from 0% in July to 4.5% today. After their last respective monetary policy meetings, which take place approximately every month and a half, the FED and the ECB have decided to stop raising their rates for the moment.

This pause is due to the fact that inflation has fallen significantly: in September in the United States it was 3.7 percent, compared to the peak of 9.1 in June of the previous year; In eurozone countries it was 2.9 percent in October, compared to the peak of 10.6 in October 2022.

Inflation remains high and it is likely that interest rates will remain high for a long time to bring it down further. It has fallen further, but the expected recession, thedifficult landing, There were none. On the contrary, the United States has an economy that is doing very well: unemployment is at 3.9 percent , slightly above pre-pandemic levels but still at a rather low level; GDP continues to rise, in the third quarter of this year it grew by 4.9 percent (much above expectations) and at the annual level it is expected to grow overall by 2.1 percent.

The Eurozone also has an economy that is doing well, although in a less disruptive way than that of the United States because there are more uncertainties and problems, particularly linked to a difficult economic situation in Germany. Apart from a brief, mild recession between the end of 2022 and the beginning of this year, GDP has returned to growth and is expected to end with an increase of 0.7% in 2023. Unemployment stands at 6 percent, a level still below lower than before the pandemic. To find similar values, we have to go back to before the 2008 financial crisis.

With these data, everyone more or less agrees that the outlook for next year will also be more or less stable compared to this year and that the situation is therefore much closer to a scenario of soft landing. For the United States, this was now rather established: until recently, among economists, the group of those who predicted this scenario was rather small (and was often also accused of reckless optimism), while today Today even some of the most important economists, such as the Nobel laureate and columnist of New York Times Paul Krugman and U.S. Treasury Secretary and former Fed Chairman Janet Yellen .

For the euro zone, things remain uncertain, notably because growth is not as strong. However, in periodic update economic forecasts, the International Monetary Fund sees the most likely scenario .

However, there is no unambiguous and quantitative definition of soft And hard landing or objective thresholds which separate one scenario from another: it is generally believed that the soft landing is the condition in which policies aimed at reducing inflation do not cause a severe recession or a significant increase in the unemployment rate, but this definition still includes cases in which there are even only slight contractions in the unemployment rate. economy or a limited increase in unemployment.

According to the Brookings Institute an American research center that deals with economic policies, a possible definition of soft landing this could apply to all cases in which the economy does not contract by more than 1 percent after an interest rate increase. On the contrary, thedifficult landing predicted a deep recession. An example concerns the American economy in the early 1980s, when there was a deep recession and the unemployment rate exceeded 10 percent (a very high value for the United States) following the decisions of the president of the FED of the time, Paul. Volcker, who raised interest rates to 19 percent to counter rising prices generated by the two oil crises of the 1970s.

The inflation of the 1970s and 1980s was the most appropriate term of comparison for that which occurred again in the last two years and many believed that the subsequent trajectory would also ultimately be similar. L’difficult landing it was therefore considered the most likely scenario at the beginning of last year. At the time, the economy was emerging from the crisis created by the pandemic, despite all the distortions and difficulties that existed, including the global trade crisis and the shortage of raw materials. Then also began the war in Ukraine, which triggered the energy crisis and aggravated all the causes that caused the price rise. The scenarios were therefore already very worrying, and it was therefore likely that the rise in interest rates could be another blow to an economy already heading towards a crisis.

The objective of increasing interest rates is to “cool” an economy that is growing too much, and which in jargon is defined as “overheated”. It is an economy in which people want to consume much more than the system can produce: demand greatly exceeds supply, resulting in an increase in prices and therefore inflation. To put it very simply, with higher rates, investments and consumption become less convenient: for example, it becomes more expensive to apply for a mortgage to buy a house, a loan to buy a car or a loan to open a business. new business. The result is that consumers and entrepreneurs often postpone their investments, thus causing a slowdown in the economy and therefore a fall in inflation: people buy less, invest less and prices stop growing.

Source: ilpost


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