A Mild Global Contraction Is Coming
While a severe hurricane for the global economy looks less likely than a few months ago, we are still likely to encounter a tropical storm that could cause significant damage. Much will depend on how major central banks confront the trilemma of simultaneously maintaining price, growth, and financial stability.
NEW YORK – There are currently four scenarios for the global economic outlook. Three of these entail potentially serious risks with far-reaching implications for markets.
The most positive is a “soft landing,” where central banks in the advanced economies manage to bring inflation back down to their 2% targets without triggering a recession. There is also the possibility of a softish landing. Here the inflation target is achieved, but through a relatively mild (short and shallow) recession.
The third scenario is a hard landing, where returning to 2% inflation requires a protracted recession with potentially severe financial instability (such as more bank distress and highly leveraged agents suffering serious debt-servicing difficulties). If the effort to tame inflation triggers severe economic and financial instability, a fourth scenario becomes possible: central banks wimp out and decide to allow for above-target inflation, risking a de-anchoring of inflation expectations and a persistent wage-price spiral.
To continue reading, register now.
Already have an account? Log in