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A soft landing is in train

Chief Economist, ANZ

2024-04-02 00:00

Mid-cycle slowdowns lack the linearity or high cross-country correlation of booms and recessions. The current absence of either factor should be welcomed, as their presence would suggest a high risk of recession. Instead, a soft landing is in train, and macro dynamics will likely remain frustratingly multi-speed.

ANZ Research expects the European Union to begin its easing cycle in June, the United States in July, the United Kingdom in August, Australia in November and New Zealand in the second quarter of 2025.

India, Indonesia, Thailand and Korea are all forecast to join China by easing in the third quarter of calendar 2024. With the full impact of previous tightening still coming through, however, economic growth is likely to continue to slow in the first half.


One support for the belief easing expectations are excessive is that domestically driven inflation in many economies has been slow to decline. But the frustration this seems to have caused primarily reflects ambitious expectations, rather than something genuinely surprising, in our view.

Unemployment in the EU is still at a cyclical low. US unemployment is only 0.5 percentage points higher than its low point. The increases in other advanced economies have been similarly mild. Wage growth, and hence domestically driven inflation, is likely to decline only slowly. But the signals of decline are unambiguous.

Services inflation lags the labour market, and that is softening. Job vacancies and consumer spending across most economies are in trend decline, and data surprise indices aren’t reporting an upside breakout.

Some confidence seems to be placed in the rise in real household incomes that will occur as inflation declines. The supplementary question, however, is whether consumers will tend to spend or save that benefit.

With price levels high, wage growth declining, and nominal interest rates still at their peak, ANZ Research expects consumers to be cautious in spending additional income. As inflation falls, real interest rates rise as well, and that implies much of the rise in real incomes is likely to be saved. Moreover, it doesn’t seem entirely logical to argue interest rates become less contractionary the longer they stay in contractionary territory.

Central banks have largely resisted the pressure to respond to the ‘last-mile problem’ with rate hikes. Whether inflation will keep declining all the way to target or stabilise above target is the uncertain part. Tightening more today to precisely calibrate an inflation forecast 12 or 18 months out is unnecessarily risky, in ANZ Research’s view. If inflation doesn’t decline all the way to target, tightening down the track is unlikely to be less effective because it is delivered later.

Fitting the soft-landing view is that two economies (UK and New Zealand) have had recessions, neither of which has been severe. Both are mild technical recessions without the credit-centric feedback loops that deepen downturns and slow recoveries. In fact, the recessions are so mild they may not exist after future revisions of the GDP data.


Japan and China remain exceptions to this broad narrative. Japan’s first rate hike since 2007 has been shrugged off by markets but should be a point of reference for those focussed on medium-term dynamics. The longest negative interest-rate regime has ended. With it, the global stock of negative-yielding debt has declined to almost zero from as much as $US18 trillion in 2020.

Direct spillovers from China’s structural funk remain modest but seem likely to grow over time. Brazil has launched an investigation into imports from China, as has Europe into China’s electric vehicles. At least one Chinese official has called for measures to address overcapacity.

China accounts for 15 per cent of world exports, nearly double the US share, suggesting strong demand is more likely to generate protectionist responses than might have been the case in the past.

Geopolitics and the social fabric remain more proximate watchpoints than the usual threats of credit and debt. Elections are more relevant to the business, economic and social environment. According to The Financial Times, in the 50 most-populated democracies in the late 2000s, seated politicians won re-election 70 per cent of the time. Now they win 30 per cent of the time.

Elections matter not just because change is more likely, but also because governments are more active in the economy. One measure has the number of industrial policy interventions globally rising eight-fold since 2017.

Industrial policies target the structure of economic activity. ANZ Research would discourage any presumption that politics only risks negative outcomes. Even populists aren’t necessarily bad for the economy. They tend to spend a lot of time focussed on trade and migration. The UK moved aggressively in these areas and the cost has been meaningful.

In the US, former president and 2024 candidate Donald Trump’s efforts in his first term around trade and migration were modest. If he is elected, the outcomes for the House and Senate will be important determinants of how much further he can go. Some businesses will benefit regardless of what policy detail is delivered.


This cycle has been atypical in many ways, and ANZ Research expects it to remain so. While an easing cycle beckons, bond markets have priced much of the likely easing already. The decline in bond yields, therefore, is likely to be quite modest.

ANZ Research expects traditional cyclical indicators will likely continue to struggle to anticipate developments. The US Leading Economic Indicator is a useful example. It has risen for one month after 22 consecutive months of decline. The previous longest run of declines was 2007–09, when policy eased aggressively.

This time around the long run of declines accorded with tightening. Now the index appears to be stabilising and may recover, so easing is likely. The last few years have been economically atypical. ANZ Research does not expect business as usual to return soon.

Richard Yetsenga is Chief Economist at ANZ

A soft landing is in train
Richard Yetsenga
Chief Economist, ANZ
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