A soft landing refers to a scenario where an economy slows down just enough to prevent excessive inflation without triggering a recession. It is the ideal outcome of central bank policies, such as raising interest rates or tightening monetary policy, aimed at controlling inflation while maintaining economic stability. In a soft landing, growth moderates, inflation decreases but the economy avoids a sharp contraction, preserving healthy employment levels and consumer spending.
Central banks, like the Federal Reserve and Bank of England, aim for a soft landing when they attempt to cool down an overheating economy. By carefully adjusting interest rates and other monetary tools, the goal is to slow growth just enough to reduce inflation pressures without causing a recession or a significant rise in unemployment. A soft landing can extend an economic expansion by preventing the economy from overheating while avoiding the economic pain that comes with a ‘hard landing’.
For investors, a soft landing is generally seen as a positive outcome. It reduces the risk of major stock market volatility and preserves corporate profitability. In such periods, cyclical sectors, such as technology, retail and manufacturing, may continue to perform well, although with more moderate growth than during periods of rapid expansion.
Achieving a soft landing, however, is challenging, as it requires balancing multiple factors such as global economic trends, supply and demand dynamics, and the timing of policy changes. While it is the preferred scenario for policymakers, external shocks – like energy crises or geopolitical events – can complicate efforts, potentially leading to a hard landing instead.
This Trustnet Learn article was written with assistance from artificial intelligence (AI). For more information, please visit our AI Statement.