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Volume IconWhat is Goldilocks scenario?

The US Fed is unlikely to breathe easy till the inflation is brought under control. It wants to pull-off a return to 'Goldilocks' while steering clear of recession. What is the Goldilocks scenario?

ImageAkash Podishetty New Delhi
Illustration: Binay Sinha

A Goldilocks scenario in an economy refers to an ideal situation where there is a steady growth. The economic growth is neither too high to trigger inflation and nor too low for a slowdown. In simple terms, in a goldilocks scenario, the economy is not expanding by a huge margin with inflation or shrinking into recession.

In this state of the economy, there are certain features attached. For one, the unemployment rate in the economy is really low. There is steady growth in the Gross Domestic Product (GDP) numbers and companies report better earnings. The retail inflation and the interest rates are relatively low. The Goldilock scenario is good for investors as companies perform well and stocks rally.

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If the economy is steady and not in for sudden shocks, there will be profitable business growth. And with low inflation levels, the central bankers may not need to go for aggressive interest rate hikes, spooking the markets. So, in a goldilock scenario, there is a good chance of stable policymaking and achieving price stability.

However, the goldilocks phase is temporary in nature and sets in typically after an adverse shock to the economy, during the recovery and growth period. Steady economic growth for any country cannot be on a sustainable long-term basis. The pace of growth might quicken eventually or slow down based on the prevailing conditions.
 
Central bankers and fiscal policy makers often try to direct their policies towards maintaining a goldilocks economy. In the US, there have been several phases of goldilock economies with the most recent in 2017, when the economy grew at near 4% and no signs of high inflation. Recently, HSBC securities said it sees a potential goldilocks scenario supporting the bull market in India. 

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First Published: Sep 21 2022 | 7:00 AM IST

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