Hard Landing

What Is a Hard Landing?

A hard landing refers to a marked economic slowdown or downturn following a period of rapid growth. The term "hard landing" comes from aviation, where it refers to the kind of high-speed landing that—while not an actual crash—is a source of stress as well as potential damage and injury. The metaphor is used for high-flying economies that run into a sudden, sharp check on their growth, such as a monetary policy intervention meant to curb inflation. Economies that experience a hard landing often slip into a stagnant period or even recession.

Understanding Hard Landings

A hard landing can be contrasted to to a soft landing, which is considered to be a more desirable goal for economic policy makers. To achieve a soft landing, government official and central banks will gradually reduce expansionary fiscal and monetary policy in an attempt to curb price inflation without sacrificing jobs or unnecessarily inflicting economic pain on people and corporations carrying debt.

Unfortunately, the more dependent the economy has become on fiscal stimulus or easy money, the more the more difficult it becomes to wean off of expansionary policy ,and the more vulnerable the economy becomes to a hard landing due to even minor checks on expansionary policy. So, typically, the longer a policy-induced boom in the economy runs or the larger an easy money-fueled market bubble becomes, the more difficult it is for officials to gradually withdraw expansionary policy support to engineer a soft landing.

This results hard landing, where slowing down or stopping expansionary macroeconomic policy can precipitate a stock market crash, financial crisis, or a collapse of investor confidence. Due to recognition, response, and implementation lags in macroeconomic policy, these events can spiral into a general recession too quickly for policy makers to mount an effective defense.

The Federal Reserve, for example, has hiked interest rates at several points in its history at a pace that the market found unpalatable, leading the economy to slow and/or enter a period of recession. Most recently, there was a hard landing in 2007 resulting from the Fed tightening monetary policy to cool the residential real estate market. The fallout was spectacular, with a Great Recession rather than just a recession, but it is difficult to imagine how a soft landing could take place when the speculative bubble had grown so large.

China's Oft Mentioned Hard Landing

The term hard landing has often been applied to China, which has enjoyed decades of preternaturally high gross domestic product (GDP) growth rates that—to some observers—have set it up for a hard landing. High levels of debt, particularly at the local government level, are often pointed to as a potential catalyst for a downturn, as are high property prices in many Chinese cities.

In late 2015, following a rapid devaluation of the yuan and softening trade volumes, many observers feared a Chinese hard landing: Société Générale put the odds of at 30%. However, trade volumes recovered and currency markets stabilized. In 2019, the talk of a Chinese hard landing resurfaced with the crackdown on shadow finance and speculation on what the loss of that credit source will do to Chinese businesses, growth, and jobs. Of course, it is worth noting that China has yet to experience a hard landing, while all the western powers predicting it on their behalf have been through a few.