Economist calls ‘no landing’ recession scenario possible only ‘in fantasy land’


There’s a new buzzword circulating amidst recession fears. It’s called a “no landing” scenario, but one economist says it’s so unlikely that if it happens, economists might throw away their text books.

What is a no landing? According to Sal Guatieri, senior economist and director of economics for Bank of Montreal, it’s first important to understand what the opposite of it is – a “hard landing.”

“Economists generally use that term to mean a pretty typical recession or worse – a standard recession where GDP could contract two to four per cent, and unemployment rate could go up two to four percentage points,” Guatieri told over the phone on Monday.

Guatieri also defined an alternative situation known as a “soft landing” – when the central bank lowers inflation to the target or restores price stability without a recession

“It avoids a recession, but still requires the economy to slow and weaken to the point where the unemployment rate moves up a little bit,” he said.

“Basically, the central bank tries to achieve sub-potential economic growth. So weak enough growth that cools inflation, yet still results in some increase in the unemployment rate.”

In other words, a soft landing is when the economy isn’t growing fast enough to accommodate all the people looking for jobs, he explained.

“Then, of course, there’s a no landing. Now that’s a situation that I don’t know we’ve ever witnessed in history,” Guatieri said. “Maybe in fantasy land.”

A “no landing” scenario is when the economy continues to grow above normal while the unemployment rate stays low, the markets remain tight, and “inflation magically cools and goes back to the two per cent target and stays there.”

“Basically, that refutes everything we’ve learned in economics,” Guatieri said. “You could pretty well toss the economic textbooks away if we do see that situation play out.”

“Now, nothing is impossible. I mean there’s always a possibility of such a happening, but, again, historically it would be very rare.”

From a probability standpoint, Guatieri attaches close to zero per cent odds of a no landing, which is far below the 15 per cent odds he attributes to a typical recession, and the 35 per cent chance of a soft landing.

“What we are calling for is something in the middle of a hard and soft landing, and that’s a mild recession,” he said. “I think that’s almost a consensus view as well. [In this scenario], the economy does slip into a recession but it’s very shallow, very short lived, just a couple of quarters. That’s our base case forecast. We have about 50 per cent odds of that situation.”

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