I have been tracking the path of annual industrial output growth in the Group of Seven (G7) major economies against “soft landing” and “hard landing” scenarios, based on average experience in prior downswings over the last 40 years. Despite the credit crisis, my bias has been to expect an outcome closer to the soft landing path, for reasons explained here.

The first chart below updates the comparison to include February industrial output data. Activity held up reasonably well in early 2008 and continues to track the historical soft landing path closely. Supportive factors have included solid export gains to emerging markets and modest stock levels in late 2007.

I still think a hard landing will be avoided but further credit tightening and commodity price gains in early 2008 may result in growth moving slightly below the soft landing path over coming months. As the second chart shows, business surveys are consistent with the annual output change falling close to zero.