This article highlights the differences between a hard and soft landing for an economy and what it means for investors.

1. What is a hard and soft landing?

A soft landing occurs when an economy sustains a mild slowdown whereby consumer and investment spending softens, but continues to register positive or flattish growth. In comparison, a hard landing describes a potential recession with a sharp contraction in spending, resulting in many workers losing their jobs and companies significantly reducing their capital investments.

To visualise a soft landing, imagine a plane landing smoothly on the tarmac - there may be some minor bumps, but overall, it is a safe landing. In contrast, a hard landing occurs when the plane has to make an emergency landing which results in damage to the plane and/or injury to the passengers.

2. Past hard and soft landings for the U.S. economy

In the 2000s, the United States’ (U.S.) economy experienced both a soft landing (in 2001 post the dotcom boom and September 11 terrorist attacks) and a hard landing (during the 2008-2009 Global Financial Crisis, or GFC). As the U.S. economy’s growth moderated from 4.1% in 2000 following the dotcom boom to 1.0% in 2001 with most consumers and companies continuing to spend and invest, this economic slowdown was considered a ‘soft landing’.

However, during the GFC in 2008-2009, the U.S.’ economic growth decelerated sharply from 2.0% in 2007 to 0.1% in 2008 and subsequently contracted by 2.6% in 2009, as the financial crisis in the U.S. and Europe significantly affected U.S. consumers and businesses; thereby resulting in a ‘hard landing’.

3. How have stock markets performed in past hard and soft landings?

Economic conditions play a significant role in influencing corporate earnings, which directly affect share prices. The pace of an economy’s slowdown - whether a hard landing or a soft landing - can therefore differently impact equity market performance. Figure 2 shows the impact of notable instances of decelerating economic growth on the U.S. equity market.



In general, a soft landing should have a moderate impact on investors’ investment portfolios. In contrast, a hard landing may lead to more volatile market conditions and have a larger financial impact on investors’ portfolios in the near term.

Meanwhile, despite the Covid-19 pandemic-induced recession in 2020, the S&P 500 Index registered an annual gain of 16.3% in 2020 as extensive fiscal and monetary stimulus measures were implemented to spur the U.S. economy’s recovery.

4. What factors could lead to a hard landing for the global economy?

There are 3 key risks that could lead to a hard landing for the global economy:

(i) Escalation of trade tensions

Should trade tensions worsen, especially among the U.S., China and other major economies, the risk of a hard landing could increase. For example, an escalation in tariff rates and retaliatory measures by countries could disrupt supply chains and weaken global trade; triggering a sharp global economic slowdown.

(ii) Elevated inflation and interest rates

Secondly, an escalation in tariff tensions could worsen inflationary pressures, prompting central banks to maintain a tight monetary policy. Central banks, such as the U.S. Federal Reserve (Fed) may maintain interest rates for longer; potentially curbing consumption and investment activities more than expected.

(iii) Heightened geopolitical tensions

Increased geopolitical tensions can raise the risk of a hard landing for the global economy by pushing up commodity prices and disrupting trade flows. For example, an escalation of conflicts in the Middle East and between Russia-Ukraine could disrupt the supply of commodities such as natural gas, crude oil and agricultural products, leading to higher input costs and global inflationary pressures.

5. What can central banks and governments do in a hard landing?

In the event of a hard landing, central banks and governments typically loosen monetary policies (e.g. lower policy interest rates) and implement expansionary fiscal policies (e.g. higher government spending). For example, during the GFC in 2008-2009, the Fed steeply reduced the Fed funds rate (FFR) from 5.25% to a record low of 0.25%.

In addition, the U.S. government may also introduce large fiscal stimulus measures should the U.S. economy experience a hard landing. For example, during the Covid-19 pandemic, the U.S. government unveiled a total of US$5.5 trillion (equivalent to 24% of U.S. nominal GDP in 2024) worth of fiscal stimulus to help boost consumer and investment spending in the U.S.

6. Equity investors should stay invested for the long run

Whether in a soft or hard landing, equity investors should stay invested throughout the economic cycle. In the last three decades since 1990, despite several economic and financial crises, the global equity markets (as proxied by the S&P Global 1200 Index) have recovered from short-term market setbacks (Figure 3).

Conclusion

Expectations for a soft or hard landing for the global economy can affect the equity markets in the near term. Nonetheless, as equity markets tend to reflect the underlying fundamentals of the economies over the long term, investors in equity funds should adopt a long-term investment perspective and to stay invested by practising Ringgit Cost Averaging (RCA) to ride through the economic and market cycles.