Global economy Regional outlook 20 | 21 Regions in focus USA Latin America UK Switzerland A close call Tougher times ahead Credibility in question Consumption is holding up US growth will average close to zero in We now project 2022 regional real GDP growth of 3.0%, up The UK entered a recession in Q3 2022. Despite slower economic growth, we believe 2022, according to our estimates, and from our previous forecast of 2.0%, as we expect stronger We expect the economy to continue to the Swiss economy will avoid recession, as remain in a slump at 0.5% in Q4 2023 growth in Brazil, Colombia and Mexico. For 2023, our contract through most of H1 2023, with a private consumption should remain solid. The versus the prior-year period. The probability regional growth forecast is 0.4%, down from 0.7%, driven by peak-to-trough GDP decline of 1.0%. The unemployment rate has declined to the of recession is high (above 40%), but expectations of weaker growth in several countries, particular- UK’s fiscal stimulus is likely to imply a lowest level in 20 years, and consumers are recession is still not our base case. Tighter financial conditions ly Brazil and Mexico. Inflationary pressures have been shallower winter recession, but risks to growth are to the still in the mood for spending thanks to the high degree of are leading to a pullback in cyclical spending, namely goods stronger and more widespread than we initially expected, downside, given the reversal of some fiscal stimulus mea- personal job security. Furthermore, immigration has picked up consumption and housing, but healthy balance sheets and a making the disinflation process challenging. By year-end sures, spending cuts, tapering of energy support and again and should prove a substantial growth driver in 2023. resilient labor market should act as a buffer against an 2023, annual consumer price inflation in inflation-targeting tightening of financial conditions. Near-term inflation is likely The surge in energy prices is feeding through to household outright downturn, in part thanks to a continued recovery in countries in the region will likely remain significantly above to have peaked, but we expect inflation to fall only slowly and expenses only in a limited manner due to price regulation, a spending on services. Inflation is beginning to moderate, but central banks’ targets. We now see nearly all inflation-target- stay above target in 2023. Fiscal support is keeping upward strong CHF and a relatively low weight of energy in private core personal consumption expenditures (PCE) inflation, the ing central banks in the region taking their policy rates to pressure on underlying inflation in the medium term. The consumption expenditure. As a result, inflation in Switzerland Fed’s preferred inflation measure, is likely to remain stubborn- double-digit territory before the end of 2022, with easing combination of the government’s expensive fiscal package is much lower than elsewhere, and we expect it to slow ly high at around 3% as of year-end 2023. We thus expect cycles unlikely to start until late 2023. and a dovish response from the Bank of England (BoE) further in 2023. Against this backdrop, there is a relatively the Fed to continue to tighten aggressively. We expect challenged market confidence in UK policy. To some degree, modest need for the Swiss National Bank (SNB) to tighten another 100 bp of hikes by the end of Q1 2023, up to a confidence has been repaired with the reversal on the monetary policy further. We expect the SNB to raise its policy terminal rate of 4.75%–5.0%, which we expect to remain Gulf Cooperation Council (GCC) extremes of the fiscal package and the announcement of a rate by another 0.5 percentage points by March 2023 and steady for 2023. fiscally credible plan. Full restoration of credibility likely subsequently keep it at 1% for the rest of the year. requires persistent monetary tightening by the BoE. We now Beneficiaries of geopolitical fractures expect the bank rate to rise to 4.5% by mid-2023. Failure to Eurozone In 2022, the GCC economies broadly benefitted from the take it there risks inflation being higher for longer, further Japan windfall of higher oil prices and a boost to their domestic weakness in the GBP, higher risk premiums and eventually economies following the pandemic and the transformed higher terminal rates, which could worsen the severity of the Energy crisis dominates geopolitical environment. We expect the GCC’s GDP growth recession. Above-target inflation in 2023 implies we do not Creeping toward a policy shift We believe recession in the Eurozone started in Q4 2022 and to moderate to 3.4% in 2023 after 6.1% in 2022 as slowing forecast any rate cuts in 2023 despite a recession. Japan’s economy is likely to see low growth of 0.5% in 2023, will persist until late Q1 2023, with a peak-to-trough fall in global growth will eventually impact their economies. supported by an easing of COVID-19 restrictions and some GDP of about 1%. Fiscal policy support, resilient labor Nevertheless, the region looks set to grow more rapidly than strength in the labor market. The jury is still out on how much markets and high savings should mitigate the depth of the the global average, supported by still elevated oil prices. As a China JPY weakness will benefit Japanese exports given damage to downturn, but the risks are to the downside amid persistent result, 2023 should see the fiscal surplus easing modestly to supply networks and downward pressure on the global uncertainty over gas supply. Headline inflation may be peaking 7.1% of GDP and the current account surplus to 15.0%. A electronics cycle. The key change that we see for the but is likely to decline only gradually as price pressures have better measure of economic activity is non-oil GDP growth, Modest recovery in 2023 Japanese economy is that inflation is likely to remain above broadened and wage growth has gained momentum. We which we expect to ease from 4.8% to 4.3% over the same We forecast below consensus growth of 2% through H1 2023. We think this, as well as downward expect persistently high inflation and currency weakness to period. This underscores the importance of transformation 4.5% for China in 2023, a bounce from pressure on the JPY due to the hawkish Fed, should lead the push the European Central Bank to hike rates aggressively to plans across the GCC, which are revitalizing the private sector. 3.3% this year. Lower growth potential, Bank of Japan to adjust its policy of yield curve control in early a terminal rate of 3% by early 2023. In our view, rate cuts are The combination of targeted government subsidies and a firm fiscal consolidation and a slow shift away 2023 to allow for slightly higher yields. unlikely in 2023. peg to the USD is expected to keep inflation below 3% in 2023. from the government’s zero-COVID policy should constrain the economy. A likely continued decline in land sales beyond 2022 will probably prolong the risk of policy hesitation at the local government level even after the eventual end of COVID-19 disruptions. The decisive factor will be how quickly China can move away from these disruptions, and our expectation is that it will do so gradually. Timing-wise, we expect China’s mainland reopening to lag that of Hong Kong by six months. Hence, any meaningful reopening is expected to happen only toward the end of Q1 2023.