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Talk of a soft landing for the global economy are premature – many dark scenarios are lurking | Larry Elliott



Central bankers are feeling smug. The fears of 12 to 18 months ago that the global economy was likely to crash as a result of rising interest rates have proved unfounded. Inflation has subsided without the expected sharp increase in unemployment.

Although it hasn’t been reflected in Joe Biden’s opinion poll ratings, the US’s performance has been especially impressive, with growth remaining strong and not even the hint of recession. Other parts of the developed world – such as the UK and the eurozone have performed less well but have demonstrated a degree of resilience not predicted when inflation hit its highest level in 40 years back in 2022.

Cue talk of a soft landing, to be accompanied by falling interest rates and rising asset prices. After a period of adverse shocks, life is finally returning to normal. The future will bring a return to prosperity brought about by the harnessing of new technology. The arrival of the fourth Industrial Revolution will usher in a new golden age of inclusive capitalism.

That, at least, is the theory and it could turn out to be true – eventually. The idea, though, that a soft landing is in the bag is premature. There are plenty of dark scenarios lurking out there: a hard landing for liberal democracy, a hard landing for capitalism, and a hard landing for the planet included.

Kristalina Georgieva is one of those who has an optimistic view of the future. The managing director of the International Monetary Fund (IMF) used a speech at King’s College, Cambridge last week to reprise John Maynard Keynes’s upbeat 1930 essay, Economic Possibilities for Our Grandchildren.

She noted that in the dark days of the Depression, Keynes had predicted an eightfold increase in living standards in the next 100 years – a pretty good forecast as it turned out. With the right policies, the IMF chief said the next 100 years could witness a ninefold increase.

Georgieva also outlined a less rosy scenario in which living standards were only three times higher in a century’s time than they are now – a reversion to the trend in the 100 years from 1820 to 1920.

As things stand, the less positive scenario she puts forward looks a lot more likely. Indeed, on the basis of what has happened since the global financial crisis of 2008 even a threefold increase in living standards might be pushing it.

Of all the threats, the least significant is the one dominating financial markets: the possibility that the last part of the battle to bring inflation down proves to be the hardest and as a result central banks not only delay cutting interest rates but also move more cautiously when they do decide to act. In that event, the prospect of borrowing costs staying higher for longer leads to a stock market sell-off.

There were tentative signs of this in the US last week, when stickier than predicted inflation led to concern on Wall Street that the Federal Reserve might not after all cut rates in June, as has been expected. A sudden collapse in US share prices would bring a hard landing back into play.

On the other side of the Pacific, there are two ways China could turn ugly. The first is through a collapse in its property market that the authorities find impossible to counter. Signs of strain are becoming more apparent, with prices falling steadily since last summer and property companies struggling to stay solvent.

The bubble has clearly burst and if the struggling property market leads to consumers spending less freely – as it almost certainly will – China’s growth targets will only be achieved by producing and exporting more goods. The country’s success in mass producing low-cost electric vehicles has already raised protectionist hackles in Europe, while relations between Washington and Beijing are already poor. The further fragmentation of the global economy is a clear risk.

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As Georgieva noted: “A fragmented world would be poorer and less secure. We see ongoing the human tragedy of Russia’s war in Ukraine and the Israel-Gaza conflict – and there are many more that often don’t make the headlines. Many nations are now reversing the cuts to military spending made after the end of the cold war. The ‘peace dividend’ is gone; and the ‘long peace’ may be at risk.”

What Georgieva did not say was that the war in Ukraine is going badly from the west’s perspective. Russia now has the upper hand and – in the absence of large-scale and rapid US military aid to Kyiv – will continue to do so.

Overshadowing all other threats is the risk of a hard landing caused by the climate emergency. As the economist James Meadway put it recently, we are moving from a world where capitalism can impose itself on the planet to a world where nature is imposing itself on capitalism.

The globalisation model – long supply chains in which the financial system linked low-cost production in one part of the world with rich consumers in another part of the world – is unravelling, partly as a result of fragmentation and partly as a result of the model’s own ecological consequences. The end is nigh for “cheap labour” and for “cheap nature”, Meadway says.

The doomsday scenario may not happen. Georgieva’s vision of a 21st-century multilateralism in which a renewed spirit of cooperation leads to progress in tackling borderless issues such as global heating may transpire. There may be a repeat of the higher investment and the expansionary economic policies that led to faster growth and reduced inequality after the second world war. There may be a transformative global green new deal. But at the moment it doesn’t feel like it.

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