One more economic concept to be part of your dictionary when it comes to the financial market: Hard Landing. The term represents a recess following a period of intense growth within a country.
And what’s the point of knowing this? Well, understanding the dynamics of Hard Landing helps to better analyze variable income, as recess periods can represent a significant drop in people’s equity.
What we will see in this article:
Hard Landing: what is it and how does it work?
Hard Landing is an economic term that means “hard landing”. It is used to designate a movement of sudden economic deceleration of a country, coming from a great period of growth.
In addition, it is used as a monetary and fiscal policy strategy in order to contain inflation. For a certain time, the country’s economy is encouraged by several factors, such as increased demand.
Growth can become unsustainable, either due to the indebtedness of the population that used financing to acquire goods or the shortage on the supply side that will need to increase prices to maintain itself.
After a period of constant growth, some countries can see the emergence of the Hard Landing phenomenon. It can even happen under government actions or naturally.
Is there a way to control it?
Most of the time, central banks take some measures to make the Hard Landing less impactful, that is, less worse. The goal is to try to keep inflation under control and also to prevent the economy from going downhill.
For this, countercyclical policies are developed with a focus on the monetary and fiscal aspects. This directly affects the circulation of currencies within the country and the relationship between supply and demand. When the strategy is expansionist, the government proposes to give incentives to credit and consumption, to generate greater economic growth.
And it is at this point that the basic interest rate, as an instrument to keep everything in order. The famous Selic is used to contain the inflationary index within the inflation targets. If they want to contract the economy and discourage credit, the rate grows.
In the case of fiscal policies, thinking of expanding the economy, the government increases the share of public investments, which also increases the budget deficit.
What changes when Hard Landing happens?
When a Hard Landing happens, the government of each country can choose how to act, in the way that is best for its economy. For example, you can adopt an expansionist posture and be careful not to lose control of the budget, as well as the spending ceiling.
So, when public spending exceeds revenue, public debt increases. The biggest impact of this is the fact that it will make basic interest rates rise, possibly leading to monetary risk and even another crisis.
The same logic applies to inflation. In a very fast-paced economy, where demand is above supply, the lack of products affects the price. While in a very decelerated economy, there is an increase in unemployment in the country, that is, the opposite.
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