While current indicators point to positive GDP growth for 2022 in many jurisdictions, downside risks are increasing. Growth forecasts have been revised down in several advanced economies (AEs) and emerging market economies (EMEs), against the backdrop of soaring commodity prices, the Russia/Ukraine war and a slowdown in China.2 The combination of unprecedentedly high inflation and low unemployment may also indicate greater recession risks. Looking back at the last four decades, these conditions have often ushered in a recession within the next two years. In the United States, a recession has always followed periods with inflation above 5% alongside unemployment below 4%
Comparing todayโs monetary tightening cycle with past ones can provide some insights into the current risks of a hard landing. Based on a comparison of 70 tightening episodes in 19 AEs and six EMEs, tightening cycles that started with high GDP growth or high job vacancies โ typical of current conditions in many economies โ have generally been followed by soft landings. That said, the current readings of three (out of eight) indicators rather point to some risks of a hard landing: these are a rapidly increasing inflation rate, a low term spread and a strongly rising household credit-to-GDP ratio. Past tightening episodes also indicate that the policy rate trajectory matters. All else equal, larger increases in (nominal and real) rates that are spread over a longer period and backloaded are more likely to be associated with hard landings. By contrast, front-loaded tightening cycles tend to be followed more frequently by soft landings.
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