Economy
Why there is no such thing as a ‘no landing’ scenario for the economy
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The U.S. economy continues to outperform expectations. January saw half a million jobs added to the labor market and retail sales grow a whopping 3%.
And suddenly, strong growth and persistent inflation have investors contemplating a new course for the economy in the coming year — a “no landing” scenario.
As the Federal Reserve aggressively raised interest rates in 2022, investors debated whether these moves would result in a “hard” or “soft” landing.
Essentially, whether rapidly rising rates would quickly choke off economic growth and inflation, or gradually slow growth and price increases. In other words, would the Fed cause a recession, or just an economic slowdown?
The newly-coined “no landing” outcome instead considers a scenario in which inflation doesn’t actually cool while economic growth continues, even as interest rates remain elevated amid the Federal Reserve’s attempts to tamp prices down.
In the view of Apollo Global Management’s chief economist, Torsten Sløk, there are growing signs of the market pricing in this outcome.
“In other words, the market is saying that inflation will be significantly higher in a year’s time than the Fed’s 2% inflation target,” Sløk said in a recent note. “Put differently, instead of expecting a recession and lower inflation, short-term inflation expectations are rising and becoming unanchored.”
Sløk highlighted the recent pick-up in one-year inflation breakevens, which are approaching 3% after the aforementioned run of strong economic data in January, suggesting investors are coming around to the idea of inflation remaining higher for longer.
But according to at least one economist, this narrative investors appear to be betting on is “nonsensical.”
“Because we’re in this highly volatile environment, and because there is so much uncertainty, we’ve now seen a number of different ways to interpret or call what we’re seeing in the economy,” EY Parthenon chief economist Gregory Daco said in an interview.
A landing — however it may ultimately look — is going to happen eventually, in Daco’s view.
The economy operates in a cyclical pattern, growing until it reaches its peak and then contracting before hitting a trough and rebounding again into an expansion phase.
“No landing does not make any sense, because it essentially means the economy continues to expand, and it’s part of an ongoing business cycle and it’s not an event — it’s just ongoing growth,” he added. “Doesn’t that entail that the Fed will have to raise rates more, and doesn’t that increase the risk of a hard landing?”
Sløk also indicated the no landing scenario would be likely to bring back the volatile market action we saw in 2022 because it reintroduces uncertainty about inflation and the Federal Reserve.
But the Federal Reserve hasn’t exactly given reason for uncertainty: officials have consistently asserted for months that rates are likely to rise above 5%.
Federal Reserve Powell has said as much himself: “There has been an expectation that [inflation] will go away quickly and painlessly; I don’t think it’s guaranteed that’s the base case,” he cautioned last Monday at the Economic Club of D.C. “It will take some time.”
And Sløk’s own expectations for how the Federal Reserve will handle this scenario align more with Daco’s thinking than current market pricing.
“The Fed will have to be more hawkish to ensure that inflation expectations do not drift too far away from the FOMC’s 2% inflation target,” Slok said in a note.
Which suggests officials may in fact need to raise rates higher, increasing the risk of a “hard landing” in the end.
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China’s world-beating electric vehicle industry, at the heart of growing trade tensions with the US and Europe, is set to receive a big boost from the government’s latest effort to accelerate growth.
That’s one takeaway from what Beijing has revealed about its plan for incentives that will encourage Chinese businesses and households to adopt cleaner technologies. It’s widely expected to be one of this year’s main stimulus programs, though question-marks remain — including how much the government will spend.
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German business sentiment improved to its highest level in a year — reinforcing recent signs that Europe’s largest economy is exiting two years of struggles.
An expectations gauge by the Ifo institute rose to 89.9. in April from a revised 87.7 the previous month. That exceeds the 88.9 median forecast in a Bloomberg survey. A measure of current conditions also advanced.
“Sentiment has improved at companies in Germany,” Ifo President Clemens Fuest said. “Companies were more satisfied with their current business. Their expectations also brightened. The economy is stabilizing, especially thanks to service providers.”
A stronger global economy and the prospect of looser monetary policy in the euro zone are helping drag Germany out of the malaise that set in following Russia’s attack on Ukraine. European Central Bank President Christine Lagarde said last week that the country may have “turned the corner,” while Chancellor Olaf Scholz has also expressed optimism, citing record employment and retreating inflation.
There’s been a particular shift in the data in recent weeks, with the Bundesbank now estimating that output rose in the first quarter, having only a month ago foreseen a contraction that would have ushered in a first recession since the pandemic.
Even so, the start of the year “didn’t go great,” according to Fuest.
“What we’re seeing at the moment confirms the forecasts, which are saying that growth will be weak in Germany, but at least it won’t be negative,” he told Bloomberg Television. “So this is the stabilization we expected. It’s not a complete recovery. But at least it’s a start.”
Monthly purchasing managers’ surveys for April brought more cheer this week as Germany returned to expansion for the first time since June 2023. Weak spots remain, however — notably in industry, which is still mired in a slump that’s being offset by a surge in services activity.
“We see an improving worldwide economy,” Fuest said. “But this doesn’t seem to reach German manufacturing, which is puzzling in a way.”
Germany, which was the only Group of Seven economy to shrink last year and has been weighing on the wider region, helped private-sector output in the 20-nation euro area strengthen this month, S&P Global said.
–With assistance from Joel Rinneby, Kristian Siedenburg and Francine Lacqua.
(Updates with more comments from Fuest starting in sixth paragraph.)
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When Moscow resident Zoya, 62, was planning a trip to Italy to visit her daughter last August, she saw the perfect opportunity to buy the Apple Watch she had long dreamed of owning.
Officially, Apple does not sell its products in Russia.
The California-based tech giant was one of the first companies to announce it would exit the country in response to Russian President Vladimir Putin’s full-scale invasion of Ukraine on February 24, 2022.
But the week before her trip, Zoya made a surprise discovery while browsing Yandex.Market, one of several Russian answers to Amazon, where she regularly shops.
Not only was the Apple Watch available for sale on the website, it was cheaper than in Italy.
Zoya bought the watch without a moment’s delay.
The serial code on the watch that was delivered to her home confirmed that it was manufactured by Apple in 2022 and intended for sale in the United States.
“In the store, they explained to me that these are genuine Apple products entering Russia through parallel imports,” Zoya, who asked to be only referred to by her first name, told Al Jazeera.
“I thought it was much easier to buy online than searching for a store in an unfamiliar country.”
Nearly 1,400 companies, including many of the most internationally recognisable brands, have since February 2022 announced that they would cease or dial back their operations in Russia in protest of Moscow’s military aggression against Ukraine.
But two years after the invasion, many of these companies’ products are still widely sold in Russia, in many cases in violation of Western-led sanctions, a months-long investigation by Al Jazeera has found.
Aided by the Russian government’s legalisation of parallel imports, Russian businesses have established a network of alternative supply chains to import restricted goods through third countries.
The companies that make the products have been either unwilling or unable to clamp down on these unofficial distribution networks.
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