How will we tell if the mythical soft landing is happening?
Our work is guided by the questions we receive from our clients and colleagues. Last year at this time, we were bombarded with inquiries about whether we were in a recession. Of late, though, a more encouraging curiosity has emerged: Are we in the soft landing? While we prefer the latter tone, it is premature to respond affirmatively.
For over a year, we have resisted forecasting a recession. Our base case remains for inflation to decline without a loss to gross domestic product (GDP) or a major gain in unemployment. All along, we have received feedback about our conclusion sounding too rosy. The assumption that nothing else would go wrong seemed unreasonably optimistic after enduring so many setbacks during the pandemic. Even Fed Chair Jerome Powell altered the scenario description to a “soft-ish” landing. Common sense dictated that some pain was inevitable.
The journey has been anything but smooth. Equity markets offered little reason for cheer throughout 2022. A rolling recession has imperiled several sectors that have since returned to growth. Crises surrounding gilt markets, cryptocurrency and the banking industry all had the potential to spark a broad downturn, but one has not emerged.
The absence of widespread malaise does not mean the hard times are over. Core inflation continues to run high, and central banks are still tightening in an effort to contain prices. Healthy labor conditions and favorable equity markets have helped to lift sentiment so far this year, but risks of a downturn are still elevated.