There’s little reason to be optimistic about a soft-landing, as the economy is set to land in an “earthquake zone” in 2024, according to top economist Ken Rogoff.
In an op-ed for Project Syndicate on Friday, the Harvard professor and former International Monetary Fund chief economist pointed to rising optimism on the global economy.
In the US, more investors and forecasters are betting on a soft-landing and another stellar year for stocks, with S&P 500 recently notching a string of record high as markets price in rate cuts from the Fed. Even known doomsayers on Wall Street, like “Dr. Doom” Nourel Roubini, have softened their worst-case scenario outlooks for the coming year.
But that optimism is likely misplaced. And even if the world does manage to avoid a recession, it’s still facing a rocky economic backdrop, Rogoff warned.
“Despite the widespread belief that the global economy is headed for a soft landing, recent trends offer little cause for optimism. As the world confronts another turbulent year, policymakers and analysts need to bear in mind that a soft landing means little if the runway is in an earthquake zone.”
Rogoff pointed to key signs of weakness plaguing some of the world’s largest economies. China is already knee-deep in an economic slowdown, with rising government debt levels making a debt-deflation spiral “increasingly likely,” Rogoff said.
Europe, meanwhile, looks poised to see lackluster economic growth this year, partly due to the cost of supporting Ukraine in its war with Russia, as well as some protectionist trade rhetoric from both political parties in the US. The ultimate effect of such policies could mirror the 1930s, when similar moves sparked a trade war that worsened the Great Depression, Rogoff added.
The US also faces trouble as the national debt continues to surge and interest rates look poised to stay higher-for-longer. Higher rates raise borrowing costs on the national debt and risk tightening financial conditions to the point where the economy tips into a recession. But lowering rates risks a resurgence of inflation, posing a tough balancing act for the Fed.
“But if real interest rates remain elevated, as many expect, the government could be forced to choose between deeply unpopular fiscal tightening or pressuring the Federal Reserve to allow another bout of inflation,” Rogoff warned.
New York Fed economists are pricing in a 63% chance the US economy could slip into a recession by the end of the year.
Investors, though, are still expecting falling inflation and lower interest rates ahead, with one-year inflation expectations falling to just above 2%, according to the Cleveland Fed. Meanwhile, markets are pricing in a 66% chance that the Fed will slash interest rates 125 basis-points over the coming year, according to the CME FedWatch tool.
