Whenever I am on a plane and the landing is announced, I start feeling a little anxious about the impending touchdown. For there have been times when I have experienced a rough landing. Often we term such a landing as “hard landing”. Now the term hard landing has now found its way into economic dictionary.
So what does hard landing of the economy mean?
To understand this let’s look at why the aircraft has a hard landing. A hard landing occurs when the aircraft impacts the ground with a greater vertical speed and force than in a normal landing. Hard landings can be caused by weather conditions, mechanical problems, over-weight aircraft, and pilot error. The term hard landing usually implies that the pilot still has total or partial control over the aircraft.
Now let us compare this with the hard landing of the economy. The economy of a country is healthy when it experiences good levels of consumption and investments and when the mood of the people is exuberant. These are times when the economy experiences growth. As growth rates increase due to high consumer demand, prices of goods and services start to rise. This is an inflection point because the gates of the economy open up to inflation. Hereafter the central bank starts to apply the brakes by raising interest rates to start slowing down the economy gradually. Here the word, “gradually” assumes a lot of significance because the job of regulating interest rates by the central bank is indeed a very delicate one.
To understand this a little better, just imagine if the pilot were to inadvertently apply the brakes of the aircraft too hard. The consequences of such an action could be very damaging and the pilot could lose control over the aircraft causing it to skid and crash. Thus the pilot needs to regulate the brakes in such a manner that the aircraft lands smoothly.
In the same way, the central bank raising interest rates is akin to applying the brakes of the aircraft. If an increase in interest rates are regulated well, then slowly but steadily the economy will slow down and inflation will gradually get harnessed. Otherwise, the economy can go out of control and experience a sudden slowdown caused by undue negative sentiments, sudden slowdown in investments and slowdown in consumption and so on and so forth. This would cause immense pain in the economy due to low capacity utilization, job losses, and defaults, etc. This pain caused by mismanagement of the monetary policy is termed as “hard landing” of the economy.
Hope this analogy of the economy with an aircraft would have helped you get a decent grasp over the term “Hard Landing” of the economy.