Global economy A year of global economic transitions Key takeaways A two-chapter outlook for the U.S. and global economies • Our forecast for a moderate We expect the U.S. and global economies to face a moderate recession through the recession in 2023 is based on a summer in 2023 followed by a second-half recovery capable of extending into resilient labor market, slowing 2024. Our view is that inflation’s noticeable decline will be the other dominant inflation, and lower interest rates. theme in 2023, shaping the trajectory of economic growth and interest rates. • We believe that a recession and More trade-sensitive, manufacturing-oriented economies abroad are bracing for unwinding inflationary shocks of a steeper economic slowdown from interest-rate increases and market liquidity the past 18 months will allow pressure potentially more serious than in the U.S. Fuel costs already are more inflation to decline to under 3% elevated than those in the U.S. Export prospects are being dented by weak on a year-over-year basis by economic growth in China, dimming prospects for world trade, and the year-end 2023. deflationary effects of a strengthening dollar in 2022. Even as the dollar's • Much lower inflation and easier exchange value flattens and partially reverses in 2023, its residual strength still Fed policy should allow the U.S. should restrain overseas opportunities for investors, as it adds to the local- dollar to peak early in the year, currency cost of commodities and dollar-denominated debt issuance. and then partially reverse its 2022 gains by year-end. The U.S. should avoid some of the challenges contributing in the past to a deep recession and drawn-out recovery. Household and bank finances are in reasonably good shape. The U.S. economy also is supported by a more resilient labor market. What it may mean for investors And we’re counting on a break in 2023 inflation to take enough pressure off purchasing power and interest rates to moderate the economic downturn. • Prospects for a more moderate economic recession in the U.S. The global recession should end sometime around mid-2023. A deeper or longer than overseas support our contraction seems unlikely, but we will be watching two main risks. First is the risk of favorable view of U.S. over tightening financial conditions tied to, among other things, higher interest rates, the international financial markets. Fed's quantitative tightening (the reduction in cash as the Fed shrinks its balance sheet), and reduced money supply growth. Second, any new commodity shortages could raise raw materials prices, prolong high inflation and monetary policy Main risks to the economic restrictions, and thereby extend the recession. outlook • We expect a moderate recession Riding the return to slower inflation into mid-2023, but a deeper or Our conviction is that inflation will decline, leaving its December 2022 to longer recession could result in December 2023 rate below 3%. Inflation is susceptible to declines now that a series the unlikely event that inflation of shocks contributing to inflation’s “spike” are unwinding: stays higher for longer or that • The recession should reduce demand for an array of goods and economically the Fed overshoots with its sensitive services, like travel and entertainment. Goods price inflation interest-rate hikes. started responding to a rotation of spending toward services and to declining freight costs in 2022. • Inflation for “stickier,” less economically sensitive prices — excluding housing — was back down to a December 2021 low by the end of September 2022. • Housing price declines should continue to gain momentum, while mortgage rates remain elevated and the weak economy undermines household formations. 6 | 2023 Outlook Please see pages 25–27 for important definitions and risk considerations.