Economy risks landing in “earthquake zone,” says Harvard professor

Down Angle Symbol A symbol in the form of an angle pointing downwards. REUTERS/Eduardo Munoz

• Growing hopes for a soft economic landing are misplaced, economist Ken Rogoff wrote this week.
• The Harvard economist sees the economy's runway in 2024 in an “earthquake zone.”
• The US faces a difficult balancing act between debt control and inflation, he said.

There is little reason to be optimistic about a soft landing as the economy will land in an “earthquake zone” in 2024, according to top economist Ken Rogoff.

In an editorial for Project Syndicate on Friday, the Harvard professor and former chief economist at the International Monetary Fund pointed to increasing optimism about the global economy.

In the US, a growing number of investors and forecasters are betting on a soft landing and another banner year for stocks, with the S&P 500 recently hitting a series of record highs as markets price in Fed rate cuts. Even well-known prophets of doom on Wall Street like “Dr. Doom” Nourel Roubini have toned down their worst-case scenario outlook for the coming year.

But this optimism is probably misplaced. And even if the world manages to avoid a recession, it would still face a difficult economic environment, Rogoff warned.

“Despite widespread belief that the global economy is heading for a soft landing, recent trends offer little cause for optimism. As the world faces another turbulent year, policymakers and analysts must remember that a soft landing means little if the runway does so in an earthquake zone.

Rogoff pointed to key signs of weakness plaguing some of the world's largest economies. China is already in the midst of an economic slowdown, and rising national debt makes a debt-deflation spiral “increasingly likely,” Rogoff said.

Europe, on the other hand, is expected to see weak economic growth this year, partly due to the cost of supporting Ukraine in its war with Russia as well as protectionist trade rhetoric from both political parties in the US. The ultimate impact of such policies could mirror that of the 1930s, when similar moves triggered a trade war that worsened the Great Depression, Rogoff added.

The US is also facing problems as national debt continues to rise and interest rates are expected to remain higher for longer. Higher interest rates increase the cost of borrowing government debt and risk tightening financing conditions to the point where the economy tips into recession. However, cutting interest rates risks causing inflation to rise again, leaving the Fed with a difficult balancing act.

“But if real interest rates remain high, as many expect, the government could be forced to choose between a deeply unpopular tightening of fiscal policy or pressure on the Federal Reserve to allow another surge in inflation,” Rogoff warned.

Economists at the New York Fed believe there is a 63% chance the U.S. economy could slip into a recession by the end of the year.

However, investors continue to expect falling inflation and lower interest rates, with one-year inflation expectations falling to just above 2%, according to the Cleveland Fed. Meanwhile, markets are pricing in a 66 percent chance that the Fed will cut interest rates by 125 basis points next year, according to the CME FedWatch tool.