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Summary – Recessions likely amidst global realignment David Page even escalate, either accidently or with Russia threatening the Head of Macro Research use of nuclear or chemical weapons. Macro Research – Core Investments Geopolitical risks are not restricted to Europe. Tensions between the US and China have worsened in recent years. Key points Recent talks between Presidents Joe Biden and Xi Jinping offer hopes of arresting a further deterioration. Taiwan remains a • We expect inflation to fall back towards target over key source of tension. The US has also imposed significant restrictions on the export of high-end technology to Chinese the coming two years as global growth slows, with companies perceived as colluding with the military. In practice, recessions forecast in both Europe and the US this casts the net widely and with the US pushing for third-party • The Ukraine war and wider geopolitical tensions are enforcement, this could materially restrict Chinese access to causing a realignment of energy and wider supply semiconductor technology. This risks impacting China’s chains tracking broad geopolitical contours potential growth and it could also have a broader impact on • Inflation looks set to fall but pressures on global trade. Yet combined with a post-pandemic realignment government finances have created social strains of global supply chains, including a mix of on-shoring, near- • Structural changes from an ageing workforce and shoring or friend-shoring, there is a marked uncertainty over post-pandemic effects add to the uncertainties the scale and impact of any deglobalisation. Exhibit 2: Russia invasion boosted inflation Previous shocks continue to pose threats Oil and wheat price USD/barrel USD/bushel Our outlook and expectation for 2023 and 2024 is to finally see 140 Russian invasion 14 inflation retreat towards central bank targets against a 120 Oil (WTI) [Lhs] 12 backdrop of soft global growth, with recessions in Europe and 100 Wheat (Soft Red no.2) [Rhs] 10 the US, alongside a lacklustre recovery in China, before a slow 80 8 recovery emerges in 2024. We recall that two of our last three Outlooks were rewritten within months of the new year. The 60 6 first after COVID-19, which had not even been identified as we 40 4 went to print; the second after Russia’s invasion of Ukraine, 20 2 which added further impetus to inflation from disrupted energy 0 0 and food markets (Exhibit 2). Chastened by both experiences, Jan-19 Jul-19 Jan-20 Jul-20 Jan-21 Jul-21 Jan-22 Jul-22 we cautiously consider the risks around this year’s Outlook. Source: Datastream and AXA IM Research, 23 November 2022 The pandemic led to the wildest swings in GDP on record. The A global realignment of energy supply is already underway, most obvious present threat from COVID-19 is in China. China’s along the lines of broad geopolitical contours. Europe faces the initial success in containing the virus has been followed by slow end of cheap and plentiful natural gas supply, a constraint likely preparation towards living with it. It recently announced to drive it into sharp recession this winter. Without the swift measures to tackle this by accelerating vaccination rates and installation of additional liquefied natural gas (LNG) import increasing medical capacities. But it is doing so against a capacity, this will also impact next winter. LNG terminals are renewed outbreak, which still threatens interim restrictions. also being pushed to their limits, with US and European The trade-off between loosening restrictions and increased facilities run at materially higher load factors than before, with vulnerability will persist and likely weigh on Chinese activity associated risks e.g., the explosion at the US Freeport terminal. across 2023. However, COVID-19 remains a global risk as the Europe is also about to impose a ban on Russian oil, with the US threat of immunity evading mutations still exists – this is to implement a price cap. Both risk uncertain reactions. difficult to quantify risk, but we assume it is easing. The outlook for energy markets also depends on the weather. A The war in Ukraine continues but recent Ukrainian successes in mild start to the Northern Hemisphere winter should help the East and South highlight the unpredictable nature of the Europe. This is consistent with a La Niña weather system over conflict which some had thought Russia would quickly win. As the South-Eastern Pacific, which is entering its third year and Russia conscripts hundreds of thousands to the region, an end often sees milder European winters. This will, however, also does not appear in sight. Moreover, there are risks that it could drive torrid weather conditions elsewhere. Moreover, climate 7

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