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Macroscope | Why US economy’s soft landing hopes could easily slip into recession
- The view that the US economy will achieve a soft landing is increasingly becoming consensus, driven in part by encouraging GDP growth figures
- However, reports on credit card debt, oil prices and continued political dysfunction in Congress could turn a soft landing into a slippery slope to recession
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In the video game Mario Kart, players race around a track avoiding obstacles such as banana peels that would cause them to spin off and crash. As the US economy has been picking up speed, investors are wondering whether slippery banana peels could see the economy lose control, as well as what form these may take.
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The soft landing view of the US economy is increasingly becoming consensus as the resilience in data continued to build through the third quarter of the year. In fact, the Atlanta Federal Reserve’s GDPNow growth tracker estimates that the economy expanded by 5.1 per cent in the third quarter of the year. This would be a remarkable outcome if it holds.
Even if the reality falls short of this estimate, the US economy likely expanded by more in the three months to the end of September than many economists and market watchers had expected.
Having said that, this is likely a high water mark for the economy as growth is likely to slow in the coming quarters, and the risk of dipping into recession should not be dismissed.
There are few examples in history of the US Federal Reserve managing to bring inflation back from elevated levels without sinking the economy into recession. As such, the odds are not in its favour this time around if history is any guide.
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There are many banana peels that could slip up the US economy, that would result in a soft landing becoming little more than a stepping stone on the way to recession.
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