The world seems headed for a mild output contraction

There are currently four scenarios for the global economic outlook. The most positive is a ‘soft landing,’ where central banks in advanced economies manage to bring inflation down to their 2% targets without triggering a recession. If the effort to tame inflation triggers severe economic and financial instability, a fourth scenario becomes possible: central banks wimp out and allow for above-target inflation, risking a de-anchoring of inflation expectations and a persistent wage-price spiral. But with stubbornly high wage growth and core inflation forcing central banks to make additional rate hikes, a short and shallow recession over the next year is much more likely. Faced with the possibility of the second scenario evolving into the third, central banks might blink and allow inflation to remain well above 2%, rather than risk triggering a severe economic and financial crisis.