You hear a lot of talk about hard landing, soft landing, no landing and balance sheet recession. But what exactly do these barbaric terms mean, as the year 2024 gets off to a flying start?
First of all, cyclical recession. Historically, this would mean a moderate contraction of the economy, followed by a return to growth in late 2024 or early 2025.
Inflation would hold steady for some time before returning to target, with interest rates remaining high for longer before central banks opt to cut rates. In terms of investment, inflation-linked bonds preferred as inflation remains sticky, although nominal bonds will benefit as rates fall.
Then the soft landing. A soft landing scenario would involve a slightly below-trend slowdown in the major economies, with no major shocks disrupting markets. The decision to keep interest rates higher for longer would bring inflation to a level with which central banks are comfortable.
This would then allow them to pivot and cut interest rates, easing the pressure on indebted households and businesses. In terms of investment, less defensive and mid-cap names likely to outperform the market.
Then there's the balance sheet recession. Historically, this would be characterized by a deep and prolonged slowdown in developed and emerging economies.
A severe default cycle would set in on corporate markets, and weaker sovereign states would also come under pressure.
As a balance sheet recession would lead to a widespread reduction in corporate and household spending, central banks would respond by sharply cutting interest rates, while inflation would also fall sharply.
In terms of investment, ‘Safe-haven’ currencies and gold would be interesting.
Finally, no landing. In a no landing scenario, US economic growth would remain resilient, while Europe's current slowdown would be reversed.
Core inflation would remain stable at one or two percentage points above central bank targets, encouraging policymakers to keep interest rates at current levels.
In terms of investment, refinancing rates could be challenging for higher-leveraged names across bonds and senior secured loans.
