A hard landing refers to a sudden and significant economic slowdown or recession following a period of growth, often as a result of actions taken to curb inflation. Central banks, such as the Federal Reserve and Bank of England, may raise interest rates or tighten monetary policy to control rising inflation, which can cause a sharp decline in economic activity. This can lead to a drop in consumer spending, a decrease in business investment and a rise in unemployment.
The term is typically used to describe the outcome of efforts to cool an overheating economy, where instead of a gradual slowdown, the economy contracts more quickly and severely than intended. Hard landings can have significant consequences for businesses and consumers alike, leading to lower profits, reduced job opportunities and diminished household wealth.
For investors, a hard landing presents heightened risks, as stock markets may become more volatile and corporate earnings could shrink. Sectors that are sensitive to economic cycles, such as consumer goods, real estate and manufacturing, are particularly vulnerable during such downturns. On the other hand, more defensive sectors like healthcare or utilities may offer better resilience in these periods.
While a hard landing can help rein in inflation, it is often associated with short-term economic pain and policymakers typically aim to avoid it by managing monetary policy carefully to achieve a ‘soft landing’ – a more gradual and controlled slowdown in economic growth. However, predicting whether a hard or soft landing will occur is challenging, as it depends on a variety of factors, including global economic conditions and the timing of policy interventions.
This Trustnet Learn article was written with assistance from artificial intelligence (AI). For more information, please visit our AI Statement.