Global economy – improving outlook defies rising downside risks

Macroeconomic outlook Q2 2023

May 2023

Trusted Intelligence woodmac.com

Global economy – improving outlook defies rising downside risks woodmac.com

Macroeconomic outlook Q2 2023

Executive summary

1. Global GDP growth outlook is improving but remains soft this year

2. Services are driving the global economy while global manufacturing PMI signals a contraction

3. China’s positive reopening lifts our GDP growth forecast for 2023 to 5.7%

4. Asia will see strongest growth globally although not all economies in the region are thriving

5. US economy brushes off banking crisis and debt ceiling conundrum fears

6. Europe proves resilient once again. We expect core economies to avoid recession, but economic
performance is still weak

7. Latin America will see key economies enter recession

8. Risks are increasing again and tilting back to the downside

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Global economy – improving outlook defies rising downside risks woodmac.com

Global GDP growth outlook is improving but remains soft this year
2023 revised up to 2.3% (from 2.2% in the Q1 update) and next year unchanged at 3.2%

Global GDP growth by economy and region

8% Forecast
5.9%
6%
Real GDP growth, annual %

3.1% 3.2%
4% 2.8% 2.7% 2.6% 2.6%
2.3% ROW
Europe
2%
Asia (ex. China)
0% US
China
-2% Global

-4%
-3.1%

-6%
2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028

Source: Wood Mackenzie macroeconomic outlook Q2 2023 2

Global economy – improving outlook defies rising downside risks woodmac.com

Services are driving the global economy

India tops growth prospects; global manufacturing PMI signals a contraction
Whole economy leading indicators Manufacturing slump

India 65 Global leading indicators at the

Saudi Arabia
>50 = Expansion
UAE highest readings since June 2022
Spain 60
Uganda
Singapore
Italy 55
Russia
UK
Asia
50

PMI reading
Qatar
Germany Stronger expansion 45 <50 = Contraction
Global
EU
Nigeria 40
China Gap between services and
Ireland Manufacturing manufacturing readings
US 35
Japan
widens to 18-year high
France
30 Composite
Brazil
South Africa Contraction
Egypt 25
Kenya Services

-5 0 5 10 15 20
April PMI reading minus 50 Jan-17 Jan-18 Jan-19 Jan-20 Jan-21 Jan-22 Jan-23

Source: Wood Mackenzie, IHS Markit 3

Global economy – improving outlook defies rising downside risks woodmac.com

Is China’s recovery on course after reopening?

The rebound is led by the service sector with hospitality and catering performing well
Imbalanced recovery in Q1  Q1 GDP outperformed expectations, recording 4.5% year-
on-year growth

Service
GDP
Industry  The recovery is imbalanced: services leading and industry
lagging, private investment weak, demand for goods soft

SOE
Investment  Fiscal and monetary stimulus will remain modest
Private

 China is on course to surpass the government’s growth

Service
Private target of ‘around 5%’
consumption Goods

 We expect the property sector to recover in H2; firmer

Completions prices and sales will support new construction starts
Property
construction Starts

-20% -10% 0% 10% 20%  Wood Mackenzie’s GDP growth forecast for 2023 is
Q1 growth (year-on-year)
revised up to 5.7%, from 5.5%
Source: Wood Mackenzie, CEIC data 4
Global economy – improving outlook defies rising downside risks woodmac.com

China’s export profile under duress: signs of a lasting evolution

Weak external demand and geopolitics are factors; weak export growth of 0.4% yoy in Q1
Export destinations pivot Type of exports also in flux

Computer With the exception of autos,

US Exports to major developed
economies contracting, driven
EU by global economic slowdown
and geopolitical issues
exports of raw materials, fuels and
Integrated circuit intermediate goods have trumped
higher value-add finished goods
MobileCellpone
phones

Japan Home
Homeappliances
aplliance
The recent trend is in contrast
Plastics with China’s ambition to develop
Australia Rest of Asia and Africa
its high-value-add industry
supporting export demand
Fertiliser
ASEAN
Finished steel
Africa China delivering as Russia pivots
east amid Western-led sanctions Oil product

Russia Auto

-20% -5% 10% 25% 40% -50% 0% 50% 100%

China Q1 exports (year-on-year) China Q1 exports (year-on-year)

Source: Wood Mackenzie, CEIC data 5

Global economy – improving outlook defies rising downside risks woodmac.com

Asia will post strongest economic growth globally this year

But the picture is mixed – India is strong, Japan is weak and some economies are in crisis
Mixed economic outlook for Asian economies
2022 2023E Q1 2023
10%
Core economies show resilience Slowdown driven by Struggling in economic crisis
8% deteriorating external demand

6%
Real GDP growth (year-on-year)

4%

2%

0%

-2%

-4%
Robust domestic demand and
lower exposure to external Balance of payments
High exposure to external demand.
-6% demand. India plans strong crisis, dwindling
Exports share of GDP
growth in public investment in foreign reserves and
41% in South Korea and 91% in
-8% infrastructure over 2023-24 debt sustainability
Vietnam
concerns
-10%
India* Indonesia Japan South Korea Taiwan Vietnam Sri Lanka Pakistan

Source: Wood Mackenzie, Factset

*Note: India data is for FY2023 and FY 2024 6
Global economy – improving outlook defies rising downside risks woodmac.com

US brushes off banking crisis and debt ceiling conundrum fears

Consumers continue to carry the baton but economic growth is slowing
US GDP by expenditure component  US GDP forecast to grow by 1.1% in 2023 and 2.8% in ‘24

120 Personal consumption has  Labour market momentum is supporting personal

picked up the growth baton as
consumption and driving economic growth, despite elevated
investment goes into reverse
110 inflation. As labour market momentum fades, the economy
will stall and then contract in Q3 2023
Index (Q4 2019 = 100)

100

 Job additions are reverting to the mean. In April, 250k jobs

90 were added, below the average of the past year (333k).
Between 2012 and 2019 monthly additions averaged 200k
Personal consumption
80
Government consumption
Investment  Investment is contracting amid aggressive interest rate
70 Exports tightening cycle
Imports
60
 We anticipate the US debt ceiling will be raised at the
eleventh hour to prevent chaotic federal spending cuts and
sovereign debt default
Source: Wood Mackenzie, Factset 7
Global economy – improving outlook defies rising downside risks woodmac.com

US interest rate tightening cycle nears peak

Unemployment dropped to 3.4% in April 2023; inflation fell to 5% year-on-year in March
US job additions Inflation dropping and rate hikes near peak
10
1000 Nonfarm payroll
All employees, monthly additions (thousands)

Inflation peaked at 8.9% in

900 Average 2012-19 June 2022
Job additions reverting
to trend after two years 8
800
of strong gains

Inflation %yoy, interest rate %

700 We expect a further 25-basis-
6 point interest rate hike to 5.5%,
600
then a six-month or so pause
500 before rates begin to fall
4
400

300
2
200

100
0
0

CPI Interest rate

-2
2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
Source: Wood Mackenzie, Factset 8
Global economy – improving outlook defies rising downside risks woodmac.com

Europe proves resilient once again; major economies to avoid recession

But economic growth is weak in 2023, with elevated inflation and rising interest rates the drag
Germany avoids recession in Q1 GDP outlook
6% After 2023 slump, growth will
1.2% Germany follows the UK Forecast pick up next year. Major
in dodging technical
economies will surpass long-
1.0% recession and outlook has 5% term historical growth rates
improved since
0.8%
Real GDP growth, qoq%

4%

Real GDP growth, %

0.6% Escalation of industrial action
3% in the UK or protest at
0.4% pension reforms in France
are downside risks
0.2% 2%

0.0%
1%
-0.2%
0%
-0.4%

-0.6% -1%
UK -0.03% in 2023
2000-21 2022 2023 2024

Germany France Italy Spain UK

Source: Wood Mackenzie macroeconomic outlook Q2 2023 9

Global economy – improving outlook defies rising downside risks woodmac.com

What is going wrong in LatAm? Chile and Argentina in recession

Fiscal support will help Brazil emerge from slump but GDP growth of just 0.8% in 2023
Outlook for Latin America is poor Argentina sovereign debt repayment schedule
5% LatAm has lost out recently to Africa and
2023 2024 emerging Asia in attracting foreign investment. 40
Argentina – will it default again?
Economic and political instability are factors
35 Under the triple threat of
4%
hyperinflation, high interest rates
Real GDP growth, %

30 and a depreciating peso, it’s likely

3% a question of when, not if,
25 Argentina defaults

US$ billion
2% 20 High share of USD-denominated
debt due in 2023 is risky
15
1%
10

0% 5

0
2023 2024 2025 2026

USD denominated LCU

Source: Wood Mackenzie, Factset 10

Global economy – improving outlook defies rising downside risks woodmac.com

Risks are increasing once again in number and probability

Global banking crisis risk re-emerges after string of issues in the US and Europe
 In the US, the collapse of Silicon Valley
Risk matrix: probability vs. impact Bank, Signature Bank and First Republic
this year has sent shockwaves through
High global markets
US-China trade war
escalation  Credit Suisse’s forced takeover by UBS in
March added to banking stress
Russia-Ukraine war  In our base case, we assume global
escalation
Probability

banking risk is contained

Entrenched high
inflation Chaotic global trade  Globally, banks are better capitalised and
reshuffle regulated than in 2008/09
Protest and
Inflation returns
industrial action
to target Global banking crisis Key

Faster interest Productivity boost Downside risk

China middle income trap
rate loosening
US debt ceiling Upside risk
Low

Low Impact High

Source: Wood Mackenzie. Illustrative purposes only. Risks are positioned subject to views of Wood Mackenzie’s macroeconomic team not a quantified impact assessment 11
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