Illusion and Reality in the "Soft Landing" of the Global Economy.. Persistent Inflation and Rising Interest Rates
The question that has preoccupied policymakers and economic analysts alike in recent months has been: Will the global economy be able to achieve a so-called "soft landing"—that is, a reduction in inflation rates without plunging the economy into a deep recession? Until recently, there seemed to be cautious optimism that major economies such as the United States and the Eurozone could succeed in this difficult maneuver, driven by a strong labor market and continued consumer spending. However, in-depth academic analysis of current data suggests that the journey toward price stability is far from over, and that the risk of recession remains inherent in the structure of the economy.
The crux of this analysis lies in the difference between "transient" inflation, which stems from supply chain disruptions, and "structural" inflation, which is linked to the labor market and expectations. While inflation has eased in the goods sector (such as cars and furniture), it remains stubbornly persistent in the services sector. This is partly because the services sector is heavily reliant on wages, and because the labor market remains tight (the unemployment rate is low), workers are demanding wage increases to offset previous inflation. This creates a wage-price cycle, making it a daunting task for central banks to combat inflation, requiring further interest rate hikes or maintaining high rates for an extended period.
From a corporate perspective, the increased cost of borrowing is beginning to bear fruit (or rather, its devastating consequences). Companies accustomed to cheap loans for expansion or share buybacks are now facing a funding gap that is impacting their profits. Small and medium-sized enterprises (SMEs), the backbone of the economy in many countries, are the hardest hit, as they lack the access to capital markets available to larger corporations. This could lead to a surge in bankruptcies, further dampening employment and investment in the coming months.
Globally, there is a sharp divergence in economic performance. While the United States is showing surprising resilience, the European Union is mired in near-recession due to the energy crisis, the effects of which continue to impact production costs. Meanwhile, China is experiencing an economic slowdown as a result of the contracting sector crisis and volatile infrastructure investments. This divergence complicates the task for central banks, as what works for one economy may be disastrous for another. Undoubtedly, government fiscal policies also play a pivotal role. In the period following the pandemic, governments injected billions of dollars to support households and businesses. Today, with the need to reduce fiscal deficits, these governments are withdrawing from the market, thus reducing aggregate demand. This fiscal withdrawal, coupled with a severe monetary tightening, could be a recipe for a sharp financial recession in the second half of this year or the beginning of next year.
In conclusion, a “soft landing” scenario cannot be entirely ruled out, but it appears highly risky. Investors and policymakers must approach this situation with extreme caution. The global economy is walking a tightrope between rising prices and a slowdown in activity. Any further shock, whether from energy price volatility or an escalation of geopolitical conflicts, could send the global economy into a tailspin. The current calm in the markets may simply be the calm before the storm.
