WEF Chief Economists Outlook 2023

Chief Economists Outlook Centre for the New Economy and Society January 2023

2 Chief Economists Outlook Disclaimer This document is published by the World Economic Forum as a contribution to a project, insight area or interaction. The findings, interpretations and conclusions expressed herein are a result of a collaborative process facilitated and endorsed by the World Economic Forum but whose results do not necessarily represent the views of the World Economic Forum, nor the entirety of its Members, Partners or other stakeholders. © 2023 World Economic Forum. All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means, including photocopying and recording, or by any information storage and retrieval system.

3 Chief Economists Outlook Chief Economists Outlook January 2023 This briefing builds on the latest policy development research as well as consultations and surveys with leading chief economists from both the public and private sectors, organized by the World Economic Forum’s Centre for the New Economy and Society. It aims to summarize the emerging contours of the current economic environment and identify priorities for further action by policy- makers and business leaders in response to the compounding shocks to the global economy from geo-economic and geopolitical events. The survey featured in this briefing was conducted November-December 2022.

4 Chief Economists Outlook Contents Executive summary __________________________________________________________ 5 1. The year ahead ___________________________________________________________ 7 Global recession risk looms __________________________________________________ 7 Inflation moderates, but slowly _______________________________________________ 9 Policymakers face trade-offs ________________________________________________ 11 2. Energy and food crises ___________________________________________________ 14 A potential peak in the cost of living __________________________________________ 14 Progress on the energy emergency __________________________________________ 17 3. Business in the new landscape ____________________________________________ 20 Expectations of rough terrain ________________________________________________ 20 Defensive strategies _______________________________________________________ 23 References _________________________________________________________________ 25 Contributors ________________________________________________________________ 28 Acknowledgements _________________________________________________________ 29 Cover: Unsplash

5 Chief Economists Outlook The January 2023 Chief Economists Outlook comes out amid continuing economic uncertainty and policy challenges of historic proportions. Although there are some grounds for optimism, such as easing inflationary pressures, many aspects of the outlook remain gloomy. Policy-makers continue to confront an array of difficult trade-offs, while households and businesses will need to adapt to persistent headwinds throughout 2023. Almost two-thirds of respondents consider a global recession to be likely in 2023, including 18% who consider it extremely likely, more than twice as many as in the previous survey in September 2022. However, views are divergent, with a third of respondents considering a global recession to be unlikely this year. Regionally, the situation in Europe and the US is now stark, with 100% of chief economists expecting weak or very weak growth for 2023 in the former and 91% in the latter. Respondents were evenly split over whether labour markets will remain as tight over the coming year given the tepid growth prospects. War and international tensions continue to shape global economic developments, and every respondent viewed it as likely (73% somewhat, 27% extremely) that patterns of economic activity will continue to shift around the world in line with new geopolitical fissures and faultlines. Chief economists expect significant regional variation in the inflation outlook for 2023. Although no regions are slated for very high inflation, expectations of high inflation range from 57% of respondents for Europe to just 5% of respondents for China. Following a year of sharp and coordinated central bank tightening, the chief economists surveyed expect the monetary policy stance to remain constant in most of the world this year. However, a majority of respondents expect further tightening in Europe and the US (59% and 55%, respectively). At the start of 2023, concerns about the cost of living remain acute in many countries. Yet, survey respondents indicate that the cost of living crisis may be close to its peak, with a majority (68%) expecting the crisis to have become less severe by the end of 2023. A similar trend is evident in the energy crisis, with almost two-thirds of respondents optimistic that conditions will have begun to improve by the end of the year. Around nine out of ten respondents expect both weak demand and high borrowing costs to exert a significant drag on business activity in 2023, with more than 60% also expecting higher input costs to be a significant factor. In response to these challenges, most chief economists expect multinational businesses to cut costs this year, with 86% of respondents saying Executive summary

6 Chief Economists Outlook they expect businesses to cut operational expenses and 78% expecting workers to be laid off. More than three-quarters (77%) of respondents also expect businesses to optimize their supply chains. The survey also asked chief economists to highlight any sources of optimism in the current global economic context. Three factors were mentioned repeatedly: the strength of household balance sheets, the peaking of inflation and the resilience of labour markets. Respondents also highlighted the prospects of a rebound in China following the shift away from zero-COVID policies, as well as economic opportunities in the energy transition, relative resilience in some emerging markets and continued workplace flexibility for knowledge workers.

7 Chief Economists Outlook 1 1 4 4 Global Recession Risk Share of respondents (%) Extremely unlikely Somewhat unlikely Neither likely nor unlikely Somewhat likely Extremely likely 32 5 45 18 Global recession risk looms The outlook for the global economy is gloomy, according to the results of the latest survey of chief economists. Global growth prospects remain anaemic, and global recession risk high. Despite some positive signals in the final months of 2022 – an easing of inflationary pressures, a modest uptick in consumer sentiment and stabilization of commodity prices – almost one in five respondents now consider a global recession to be extremely likely in 2023, more than twice as many as in the previous survey in September 2022. However, 32% also expect a global recession to be extremely unlikely or somewhat unlikely, more than twice as many as in September. This polarized outlook reflects a weakening of growth expectations across most but not all regions and significant continued uncertainty about the effectiveness and duration of tightening policy measures. The International Monetary Fund (IMF) expects around a third of the global economy to enter a recession in 2023, and it has further trimmed its forecast of global gross domestic product (GDP) for the year to 2.7%. 1 Figure 1. Global recession outlook How likely is a global recession in 2023? 1. The year ahead 1 IMF, October 2022a. Source: Chief Economists Survey, December 2022 Note: The numbers in the graphs may not add up to 100% because figures have been rounded up/down. The survey also highlighted significant regional divergence in growth expectations (Figure 2) within a general pattern of weakened expectations relative to the last survey. The situation in Europe and the US is now stark, with 100% of chief economists expecting weak or very weak growth this year in the former and 91% expecting weak or very weak growth in the latter. This marks a significant deterioration in recent months: at the time of the last survey, the corresponding figures were 86% for Europe and 64% for the US.

8 Chief Economists Outlook For Europe, this is likely to reflect the deepening impact of the ongoing war in Ukraine as well as the effects of sharp increases in interest rates. The combination of high energy prices, elevated borrowing costs and sluggish demand has even led to instances of industrial capacity being left idle. With about half of the EU steel plants at a standstill as of November 2022 and fertilizer production capacity reduced by 70%, the European industrial sector is facing a challenging year ahead. 2 The extent of the deterioration in the European outlook is also reflected in the latest round of IMF forecasts: while global growth for 2023 was trimmed by 0.2 percentage points, the forecast for the Eurozone slumped from 1.2% to 0.5%. In the US, the pace and extent of monetary tightening will exert a significant drag on economic activity this year. The survey results for the 2023 outlook in China are polarized, with almost half of respondents now expecting weak or very weak growth in China, with the other half expecting moderate or even strong growth. Recent moves to unwind the country’s highly restrictive zero-COVID policy are expected to deliver a boost to growth. However, it remains to be seen how disruptive the policy shift will be, particularly in terms of the health impacts of COVID-19’s expected rapid spread through the population. A number of additional factors are likely to weigh on China’s growth in 2023, such as weak consumer confidence, missing the 5% growth target for 2022 and continued strain in financial markets and the real-estate sector. 3 The two strongest regions in 2023 according to the survey are the Middle East and North Africa (MENA) and South Asia. In South Asia, 85% of respondents expect moderate (70%) or strong (15%) growth, a modest improvement since the September edition. Figure 2. Economic growth What is your expectation for economic growth in the following geographies in 2023? Share of respondents (%) Very weak Weak Moderate Strong Very Strong Middle East and North Africa South Asia China East Asia and Pacific Central Asia Sub-Saharan Africa Latin America and the Carribbean Europe 5 15 10 37 16 68 32 68 32 53 26 5 58 5 38 38 14 70 15 25 55 15 9 82 9 68 32 United States 2 Mati and Rehman, August 2022 and IMF, September 2022. Source: Chief Economists Survey, December 2022

9 Chief Economists Outlook Some economies in the region, including Bangladesh and India, may benefit from global trends such as a diversification of manufacturing supply chains away from China. 4 In MENA, two-thirds of respondents (70%) expect moderate or strong growth in 2023. While this overall proportion has slightly dipped since the September edition, expectations of strong growth have increased from 12% to 15%. Energy exporters in the region continue to benefit from tight commodity markets, but oil prices have fallen by almost 25% since June 2022 5 , and these countries will be vulnerable to the impacts of any slowdown in global growth in 2023. In the East Asia and Pacific region, 37% of chief economists expect weak growth in 2023, and 63% expect moderate or strong growth, similar to September. However, that broad pattern masks a shift in expectations from strong to moderate growth since the last survey. During that period, the region has seen negative terms-of-trade developments, as well as policy tightening moves that placed increased pressure on households and businesses. 6 Challenging global financial conditions are also weighing on the economic outlook for Latin America and the Caribbean, and for Sub-Saharan Africa. For both regions, 68% of respondents expect weak growth in 2023. This is a slight improvement for Sub-Saharan African but points to a worsening of conditions for Latin America and the Caribbean. Inflation moderates, but slowly Inflation over the last year was stubbornly high and broad-based, but a number of modestly encouraging data releases in the final quarter of 2022 provide some room for optimism over the medium-term inflation outlook in 2023. A range of factors have contributed to a slight easing of the rate of inflation, including rapid and synchronized monetary tightening, stabilization of supply conditions and commodity prices, and an easing of demand pressures. The latest IMF forecast is that global inflation will dip to 6.5% this year from 8.8% in 2022. 7 3 IMF, October 2022a. 4 Economist Intelligence Unit, December 2022b. 5 Based on World Bank Monthly Commodity prices, November 2022. 6 IMF, October 2022a. 7 Ibid.

10 Chief Economists Outlook Figure 3. Inflation What is your expectation for inflation in the following geographies in 2023? Very low Low Moderate High Very High Share of respondents (%) Share of respondents (%) Europe Latin America and the Caribbean Central Asia Middle East and North Africa Sub-Saharan Africa South Asia United States East Asia and Pacific China 5 43 57 55 11 11 6 26 76 26 58 16 48 48 5 24 47 26 61 33 47 53 37 42 45 Source: Chief Economists Survey, December 2022 According to the latest survey, chief economists see significant regional variation in the inflation outlook for 2023. Although no regions are slated for very high inflation, expectations of high inflation range from 57% of respondents for Europe to just 5% of respondents for China. The direction of changes in responses since the last edition differs from region to region. For example, the proportion of respondents expecting high inflation in Europe has increased from 47% to 57% since September, while for the US, it has declined sharply from 43% to 24%. The expectation is for moderate inflation throughout 2023 in several regions: Sub- Saharan Africa (61%), East Asia and Pacific (58%), MENA region (53%) and South Asia (47%). By contrast, in Latin America and the Caribbean and Central Asia, relatively high shares of respondents expect high inflation (45% and 42%, respectively). This is likely to reflect a combination of supply chain disruptions from the war in Ukraine as well as the continuing impact of spikes in food and fuel prices during 2022. 8 China is an outlier in the other direction, with almost half of respondents (48%) expecting low inflation (up from 28% in September). As noted above, however, the short-term outlook for the Chinese economy is clouded by uncertainty surrounding the speed of the country’s removal of pandemic restrictions. If a full re-opening leads to a sharp recovery in economic activity, it would be likely to push Chinese prices significantly higher than previously seemed likely, as well as adding new impetus to global inflationary pressures. 9 8 IMF, September 2022. 9 Goldman Sachs, November 2022; Curran, December 2022.

11 Chief Economists Outlook Policy-makers face trade-offs The global backdrop of weak growth and persistently high (albeit moderating) inflation presents policy-makers with challenges of historic proportions at the start of 2023. Chief among these will be the need to bring inflation much closer to the 2% target without choking off growth, but the challenges run deeper. Accumulated societal strains from the last years as well as climate mitigation and adaptation present pressing investment needs in numerous countries. In the immediate term, central banks are the key economic decision-makers. F ollowing a year of sharp and coord inated tightening, the c hief economists su rveyed expect the moneta ry policy stance t o remain constant in most of the world thi s year (see Figure 4). In Europe and the US, a majority of respondents (59% and 55%, re spec tively) expect further ti ghtening in 2023. The Federal Reserve a nd the European Cent ral Bank have both in dicated that su ch additional tight ening is on the way, but it is notable that th e two banks’ mos t recent rate increases i n December were smalle r, at 50 basis points , than previous 75 basis point hikes in the current tightening cycle. Nonetheless, a q uarter of respon dents expect looser monetary policy in the US and Europe by the end of 2023. Figure 4. Monetary policy A year from now, what is your expectation for monetary policy in the following geographies? United States Latin America and the Caribbean Europe East Asia and Pacific South Asia Middle East and North Africa Looser The same Tighter 53 Sub-Saharan Africa 81 China 53 Central Asia 7 80 13 20 67 13 13 69 19 6 71 24 7 80 13 27 14 59 28 56 17 27 18 55 50 40 10 Source: Chief Economists Survey, December 2022

12 Chief Economists Outlook Policy-makers face a dilemma betw een tightening too muc h and too little. Tightening too m uch may lead to a deep and/or prolonged re cession causing unnecessary harm to households and businesses. Yet ti ghtening too little can be worse, causing co ntinued cost of livi ng and high input costs, and potentially even steeper monetary tightening at a la ter date to restore pric e stability. The t imi ng of easing off moneta ry tightening also p oses a dilemma. The IM F points to the ex ample of the US Federal R eserve in the lat e 1970s, under the leaders hip of Paul Volcke r, w hen interest rates w ere cut after a significant phase of interest rate rises, only for a further sharp tightening pha se to ensue when inflation accele rated again. 10 So while there are signs that m onetary tightening is having its desired effect – for example, at the time of writing the US has recorded fiv e consecutive mont hs of declining in flation, while Eurozone inflation expect ations appear relatively well anchored over a t hree-year horizon 11 – caution is req uired in determi ning when policy can be loosened agai n. Fiscal policy-make rs face signific ant challenges too, not least because of the greatly reduced fiscal space in the wake of exceptional g overnment expenditure during the COVID- 19 pandemic. M any governments have se en their borrow ing costs rise significantly in the face of global monetary tightening, highlighting the close interlocking of fiscal and monetary trends at present, as well as the dilemma many governments face between immediate investment needs and constraints on fiscal revenues. 12 Even where spending is possible, governments need to address multiple current societal and climate challenges through medium- to long- term investments in health, education, care, infrastructure and energy to boost resilience without setting off a vicious cycle of overheating and higher costs. There are political pressures too, with the risk that fiscal tightening could trigger an electoral backlash at a time of economic strain for many households. 13 In the latest survey, respondents largely expect continuity in fiscal policy. In Europe, however, a plurality of respondents (41%) expect policy to tighten over the next year. China is an outlier on both monetary and fiscal policy expectations. Almost two-thirds (65%) of respondents expect fiscal policy to loosen, while 50% expect monetary policy to loosen. This suggests a firm view that policy support is needed to revive growth in China and that current low levels of inflation create more space for such policy moves than in most other countries or regions. 10 IMF , October 2022a. 11 ECB, 7 December 2022. 12 MF , October 2022b. 13 Gabriel, Klein, Pessoa, July 2022.

13 Chief Economists Outlook F igure 5. Fiscal p olicy A year from now, w hat is your expec tation for fiscal p olicy in the following geograp hies? United States Latin America and the Caribbean Europe East Asia and Pacific South Asia Middle East and North Africa 53 Sub-Saharan Africa 81 China 53 Central Asia 18 19 23 13 13 13 13 75 19 81 65 25 10 12 6 82 12 76 12 75 36 41 63 19 55 27 Looser The same Tighter Source: Chief Economists Survey, December 2022

14 Chief Economists Outlook 2. Energy and food crises A potential peak in the cost of living The September 2022 edition of the Chief Economists Outlook highlighted the intensifying human impact of the cost of living crisis, with plunging real wages leading to worsening poverty and more widespread social unrest. 14 At the start of 2023, these concerns are still evident, and many households confront a dual challenge of facing relatively high costs for basics such as heating and eating, at the same time as feeling the effects of monetary policy designed to curtail inflation in the longer term. However, survey respondents indicate that the cost of living crisis may be close to its peak as policies begin to take their full effect, and a majority (68%) expect the crisis to be less severe by the end of 2023 (see Figure 6). However, the continuing impact of the cost of living crisis should not be underestimated. A majority of respondents are of the view that energy and food costs will continue to have an adverse impact on households in both high- and low-income countries throughout 2023 (see Figure 7). Looking at global consumer price inflation data, the food and energy categories recorded the sharpest price increases in 2022, pushed up by a confluence of factors including war, multiple supply chain shocks and commodity market disruption. Figure 6. Cost of living Looking ahead to 2023, do you agree/disagree with the following statement? 1144 The cost of living crisis will be less severe at the end of the year than at the beginning Strongly disagreeDisagree Uncertain Agree Strongly agree Share of respondents (%) 23 9 50 18 Source: Chief Economists Survey, December 2022 14 W orld Economic Forum, September 2022.

15 Chief Economists Outlook people to face acute food insecurity in 2023 – a sharp increase from 193 million in 2021 – with 45 million on the brink of famine. 16 However, there are some reasons for optimism about food price trends. For example, the Food and Agriculture Organization (FAO) Food Price Index recently returned to the same level as before the invasion of Ukraine, following the extension of the Black Sea deal that facilitates exports of grain from Ukraine’s ports. 17 On energy costs, over 80% of respondents expect a significant adverse impact in both developing and developed economies. 15 IMF Data, November 2022. 16 WFP and F AO, September 2022. 17 F AO, November 2022. Figure 7. Living standards Which of the factors below are likely to have a significant adverse impact on living standards in 2023? Share of respondents (%) Extremely unlikely Somewhat unlikely Neither likely nor unlikely Somewhat likely Extremely likely High-income economies Energy costs Food costs Debt servicing costs Core inflation Wage dynamics Low-income economies High-income economies Low-income economies High-income economies Low-income economies High-income economies Low-income economies High-income economies Low-income economies 9 14 14 5 23 9 9 5 36 45 14 27 27 5 59 32 5 27 45 50 14 9 36 45 9 59 9 9 36 50 18 55 14 27 5 55 9 55 27 S ou rc e: Chief Economists Survey, December 2022 On food costs, t here is a notab le d ivergence in the expected impact between hi gh- and low-income coun tries. This is refle cted in the much higher pro portion of chief economists saying that fo od costs are ext re mely likely to have signific ant adverse impa ct in low- income economies (50%) compared to high-income eco nomies (14%). Overal l, an adverse impact o n living standards f rom food costs is expe cted by 69 % in high- income economies and 86% in low- income economies. This is also evident in the hard data, with low -income countries re cording food price inflat ion of 29%, compared to a global average of 19%. 15 The World Food Programme now esti mates up to 222 million

16 Chief Economists Outlook In addition to rising prices for goods and services, significant increases in borrowing costs are beginning to place an additional strain on household finances. According to the survey results, there is again a significant divergence between the impact in high-income and low-income economies. In the former, 68% of respondents expect debt servicing costs to have an adverse impact, but only 9% say this is extremely likely rather than somewhat likely. For low- income economies, a total of 81% expect an adverse impact, and a much higher proportion (45%) see this as extremely likely. On the income side of the cost-of-living squeeze, the respondents expect wage dynamics to have a relatively less adverse impact on households than other cost categories (see Figure 7). Global wages data are patchy and subject to a significant lag, but the latest estimates from the International Labour Organization (ILO) point to global real wage growth dropping from an average of 1.8% in 2021 to register a year- on-year decline of 0.9% in the first half of 2022. 18 According to these data, real wages slumped sharply in North America and the EU during this period, falling by 3.2% and 2.4%, respectively, while most other regions recorded slow real wage growth rather than declines. 19 Relatively tight labour markets in Europe and North America helped to limit the decline of real wages, while reopening various sectors after lockdowns has led to wage growth, albeit from low levels, in several developing economies. However, chief economists are split over whether labour markets will remain as tight over the coming year given the tepid growth prospects, posing a significant potential risk to the expectation of the cost of living crisis ebbing by year-end. Figure 8. Labour markets Looking ahead to 2023, do you agree/disagree with the following statement? 1 1 4 4 Labour markets are likely to continue to remain tight in most advanced economies by the end of the year Share of respondents (%) 41 18 41 Strongly disagree Disagree Uncertain Agree Strongly agree Source: Chief Economists Survey, December 2022 18 ILO, November 2022. 19 Ibid.

17 Chief Economists Outlook Progress on the energy emergency Turning to the energy crisis, the majority of respondents (64%) show optimism about the overall trajectory of the crisis in 2023, while also highlighting the need for numerous short-term and long-term policies to deal with challenges that remain to be resolved. Oil prices have fallen back to pre- war levels, but the same is not true of global gas prices, which in November 2022 were 321% higher than two years previously. 20 The expectation that the energy crisis will be less severe by the end of 2023 reflects the current stress-testing and improvement of systems and processes, diversification of energy supply sources, improved energy efficiency and changing patterns of consumption. Progress in a range of these areas is already evident in Europe, for example, including a tripling of gas reserves, the securing of new supply deals, and a trimming of gas consumption by 15%. 21 Nevertheless, the crisis remains far from resolved. The survey asked chief economists for their views on the effectiveness of a range of options designed to deal with short-term and long-term challenges posed by the crisis for energy-importing countries. Of the short-term measures, reduction of energy consumption is the preferred one, with 55% of respondents describing it as effective and a further 27% as highly effective (see Figure 10). In addition to easing immediate pressure on the energy system and helping to avoid the worst-case scenario of blackouts, reducing energy consumption also minimizes the work that needs to be done by other policy responses. Figure 9. Energy crisis Looking ahead to 2023, do you agree/disagree with the following statement? 1 1 4 4 The energy crisis will be less severe by the end of the year than at the beginning Share of respondents (%) Strongly disagree Disagree Uncertain Agree Strongly agree 5 9 23 55 9 Source: Chief Economists Survey, December 2022 20 Based on World Bank Monthly Commodity prices, November 2022. 21 European Commission, November 2022.

18 Chief Economists Outlook Figure 10. Energy policy to address the crisis In the short term, which policy approaches are likely to be effective in tackling the energy crisis in net energy-importing economies? Highly ineffective Ineffective Neutral Effective Highly effective Share of respondents (%) 5 Energy price caps Reduction in VAT and/or energy taxes Diversification of energy sources Direct cash transfers to households and businesses Measures to reduce energy consumption 5 41 9 36 9 5 5 27 18 45 5 18 23 41 18 5 18 14 41 23 9 9 55 27 Most of the other policy approaches considered by the chief economists were also viewed as being effective or highly effective by the majority. However, the use of energy price caps stands out as the most contested option, with an almost equal split between those viewing caps as effective and as ineffective. This is unsurprising given the intensity of debate that has surrounded the introduction of a price cap for gas in the EU, including concerns about its potential implications for the financial stability of the Eurozone. 22 The EU gas price cap, as well as a G7 oil price cap, were approved in December 2022, and it will be some months before there is clear evidence as to their effectiveness. 23 On long-term energy policies, chief economists were asked to focus on the effectiveness of various measures in terms of achieving energy security for net-importing economies (see Figure 11). Reducing consumption again features prominently, with 86% viewing it as an effective strategy, but is in third place overall. Improved energy efficiency is the clear frontrunner, with unanimity among respondents as to its effectiveness in the long term. This is in line with the International Energy Agency (IEA) view that energy efficiency is central to the shift that needs to take place in advanced economies. 24 Many countries, particularly in Europe, have already begun to move in this direction in response to the crisis. Germany, for example, has introduced higher efficiency standards for new buildings, 25 and France launched its “Energy Sobriety” plan in October 2022. 26 22 ECB, 2 December 2022. 23 Council of the EU, 19 December 2022; Council of the EU, 3 December 2022. 24 International Energy Agency (IEA), November 2022. 25 Sgaravatti, Tagliapietra, Zachmann, November 2022 26 Government of France, October 2022. Source: Chief Economists Survey, December 2022

19 Chief Economists Outlook Figure 11. Long-term energy security Which policy approaches are likely to be most effective for achieving long-term energy security in net energy-importing economies? Highly ineffective Ineffective Neutral Effective Highly effective Share of respondents (%) Strengthening energy self-sufficiency Investing in additional energy capacity Reducing energy consumption Diversifying sources of energy imports Improving energy efficiency 64 5 5 5 5 32 41 27 9 14 41 41 45 41 45 45 36 Source: Chief Economists Survey, December 2022 Among the other policy options presented, diversification of sources of energy imports was seen as the second most effective option – 90% view it as effective, including 45% as highly effective, the largest proportion for any of the options. This option will be crucial in Europe even in the short term. The EU’s ban on oil-product imports from Russia takes effect in February 2023, while reserves of natural gas are projected to be depleted by March 2023. 27 Although the war in Ukraine is central to the energy crisis in Europe, global security-of- supply concerns in 2023 are unlikely to be driven only by developments in the war. For example, if China’s easing of its zero-COVID restrictions is successful, it is likely to push up demand for liquified natural gas (LNG) and oil products, including diesel, which is becoming increasingly scarce. 28 27 IEA, October 2022. 28 The Economist, November 2022.

20 Chief Economists Outlook 3. Business in the new landscape Expectations of rough terrain As the world puts another tumultuous year behind it, chief economists were asked for their views about some of the likely headwinds that businesses in particular are going to face in 2023 (see Figure 12). They were also asked about the most effective responses to these headwinds and sources of optimism, which are addressed in the next section. Among the headwinds, weak demand, higher interest rates and higher input costs stand out. Nine out of ten respondents expect weak demand to exert a significant drag on business activity this year, and almost the same proportion (87%) expect the same of elevated borrowing costs. Over 60% expect higher input costs to exert a significant drag. The start of 2023 represents the triple challenge of continued relatively high prices of key inputs meeting tightening monetary policy and weakening demand. Figure 12. Challenges to business activity Which of the factors below are likely to exert a significant drag on business activity in 2023? Share of respondents (%) Regulatory and policy uncertainty Supply chain disruptions Talent shortages High input costs High cost of borrowing Weak demand Extremely unlikely Somewhat unlikely Neither likely nor unlikely Somewhat likely Extremely likely 9 14 18 5 18 5 45 27 18 5 45 27 9 50 36 9 18 50 14 55 32 64 27 Source: Chief Economists Survey, December 2022

21 Chief Economists Outlook Energy prices are a key factor here, which in turn means that Europe will be particularly exposed owing to the impact of the war in Ukraine. According to one recent estimate, the rate of increase of European input costs is set to outpace those of other advanced economies by as much as 20 percentage points from this year, threatening the competitiveness of the region’s producers and running the risk of diverting supply chains and business activity away from the region. 29 The results are less definitive for the other potential business headwinds that respondents considered. Talent shortages were cited by 45% of respondents as being somewhat or extremely likely to exert a drag on business activity, a slightly lower proportion than the 55% who were neutral or viewed it as unlikely to have an adverse business impact. In part, this may reflect the fact that global labour market conditions vary widely, and while there may be some markets where conditions are exceptionally tight – in the US, there are currently 1.7 job openings per unemployed person 30 – this is not the case more widely. Additionally, as businesses look towards cost-cutting measures, talent availability is expected to be a lower-order concern. Asked about regulatory and policy uncertainty, a lower proportion of respondents (36%) said that they expect this to exert a drag on business activity, compared to the 63% who were neutral on the question or who disagreed that there would be an adverse impact. Efforts by policy-makers to restore some level of policy certainty after the turbulence of the last years have been relatively effective. Finally, when it comes to the business impact of supply chain disruptions in 2023, only 23% expect a significant effect on business activity, while 50% consider it either somewhat unlikely or extremely unlikely that there will be a significant adverse impact, reflecting significant stabilization after COVID-19 restrictions and integration of war-related disruptions in business planning. 29 Economist Intelligence Unit, October 2022. 30 Bureau of Labor Statistics, January 2023.

22 Chief Economists Outlook Figure 13. The year ahead Looking ahead to 2023, do you agree/disagree with the following statements? Share of respondents (%) Geopolitical faultlines will continue to significantly realign global economic activity The cost of living crisis will be less severe at the end of the year than at the beginning The energy crisis will be less severe by the end of the year than at the beginning Debt distress in developing economies will have significant spillover effects across global financial markets Further spikes in COVID-19 case numbers will exert a significant drag on global economic activity Crypto disruption will have significant spillover effects across financial markets Labour markets are likely to continue to remain tight in most advanced economies by the end of the year 23 55 23 5 55 23 18 5 41 32 18 5 41 18 41 5 9 23 55 9 23 9 50 18 73 27 Strongly disagree Disagree Uncertain Agree Strongly agree Source: Chief Economists Survey, December 2022 However, geopolitical trends overall are expected to continue to redraw the map of global economic activity: every respondent viewed it as likely (73% somewhat, 27% extremely) that economic activity will continue to reallocate around the world in line with new geopolitical fissures and faultlines. This wider economic impact channels through trade, investment, labour and technology flows, creating myriad challenges and opportunities for business, even as supply chain disruptions are seen to impose a relatively low drag on business activity in the coming year. At the other end of the spectrum, the fall of the cryptocurrency sector is expected to have relatively little spillover into wider financial markets and the majority of chief economists do not expect further economic disruption from COVID-19. Only a quarter of respondents expect debt distress in developing economies to have wider contagion in global financial markets. The survey also asked the chief economists to highlight any potential source of optimism in the current global economic context. Half of the responses touched on three factors related to the cost of living crisis: the strength of household balance sheets, the peaking of inflation and the resilience of labour markets. Results indicate that chief economists expected the outcomes of the latest shocks to have been worse, the impending downturn to be relatively short-lived and the current resilience to form a cornerstone of future recovery. Respondents also highlighted the prospects of a rebound in China following the shift away from zero-COVID policies, economic opportunities in the energy transition and diversified supply chains, relative resilience in some emerging markets, and continued workplace flexibility for knowledge workers. Responses did not indicate signs of optimism about global reintegration and recovery in trade, cementing the impression of a low- growth, low-investment outlook for 2023.

23 Chief Economists Outlook Defensive strategies In response to the headwinds in 2023, the majority of chief economists expect multinational businesses to cut costs, with 86% of respondents saying they expect businesses to cut operational expenses. This is in line with a growing number of corporate announcements of cost-cutting programmes since September 2022. High- profile examples include FedEx 31 , which is grappling with a post-pandemic fall-off in demand, and Intel, which has announced plans to cut costs by $3 billion in 2023 and by $10 billion over the next three years. 32 In addition, 78% of respondents expected businesses to cut costs by laying off workers. There are already numerous examples of significant layoffs in the final months of 2022, such as an estimated decline of 13% in Meta’s workforce and multiple other global businesses announcing cuts to their workforces, including giants such as Amazon, Walmart, Goldman Sachs, Citigroup and Barclays. 33 These expectations confirm continued uncertainty about the future strength of the labour market. Figure 14. Strategy choices How do you expect multinational companies to respond to potential economic headwinds in 2023? Source: Chief Economists Survey, December 2022 Strongly disagree Disagree Uncertain Agree Strongly agree Share of respondents (%) Increase prices to pass on higher costs to consumers Increase investments to improve resilience Reduce prices to maintain or increase market share Increase investments to improve competitiveness Postpone investments to save money Optimize supply chains 32 32 32 5 18 14 50 18 14 14 50 23 45 18 32 5 5 41 41 14 18 5 64 14 Reduce costs by laying off workers 5 18 59 18 Reduce costs by cutting operational expenses 14 59 27 31 FedEx, September 2022; FedEx, December 2022. 32 Intel, October 2022. 33 The Economist, December 2022.

24 Chief Economists Outlook More than three-quarters (77%) of respondents expect businesses to respond to headwinds by optimizing their supply chains. This is closely in line with the findings of the September edition around the need for supply chain localization and diversification and reiterates the finding discussed above that respondents do not expect supply chains to be a significant drag on activity this year as they make these adjustments. About two-thirds of respondents (68%) expect prices to be increased by businesses so that input costs can be passed on to consumers. This reflects the significant pricing power that many companies enjoy during this period of higher consumer prices, with the net prices being charged by some major companies rising by as much as 11%. 34 When asked to assess an opposite strategy, in which businesses reduce prices to maintain or increase market share, this was deemed likely by only 32%. Almost three-quarters of chief economists (73%) said they expect businesses to postpone investments in 2023 in order to save money. Much smaller proportions see it as likely that businesses will increase investments designed either to boost competitiveness (14%) or to increase resilience (37%). This is consistent with lessons from the 2008 financial crisis when improvements in margins through defensive strategies were deemed to be more effective in helping businesses to withstand economic headwinds compared to growth strategies. 35 The survey also asked chief economists what strategies businesses might adopt in the face of rising interest rates and mounting geopolitical tension. Regarding rising interest rates, the majority of responses include greater focus on balance sheet health, deleveraging and reduction of investments. However, a significant set of responses viewed higher interest rates as a transitory investment rather than a shift into a new longer-term era signalling the end of cheap money. In the case of more complex geopolitics and reduced global integration, chief economists expected lower cross-border investment, a shift to “just in case” strategies, and maintenance of diversification and localization mix. Based on these trends, the overall impact on prices, efficiency and growth in the medium term will be significant. 34 Hart, July 2022. 35 McKinsey, December 2022.

25 Chief Economists Outlook References Bureau of Labor Statistics, “Job Openings and Labor Turnover Survey News Release”, 4 January 2023, https://www.bls.gov/news.release/jolts.htm. Council of the European Union, Russian oil: EU agrees on level of price cap Press Release , 3 December 2022, https://www.consilium.europa.eu/en/press/press- releases/2022/12/03/russian-oil-eu-agrees-on-level-of-price-cap/. Council of the European Union, Council agrees on temporary mechanism to limit excessive gas prices Press Release , 19 December 2022, https://www.consilium.europa.eu/en/ press/press-releases/2022/12/19/council-agrees-on-temporary-mechanism-to-limit- excessive-gas-prices/. Curran, Endy, “China Is the Wild Card for Global Inflation in 2023”, Bloomberg , 7 December 2022, https://www.bloomberg.com/news/articles/2022-12-07/china-covid-zero- policy-will-shape-2023-global-inflation. Economist Intelligence Unit, “Energy crisis will erode Europe’s competitiveness in 2023”, 13 October 2022, https://www.eiu.com/n/energy-crisis-will-erode-europe- competitiveness-in-2023/. Economist Intelligence Unit, Europe outlook 2023 , December 2022a, “The threats to Europe’s industrial competitiveness” , https://www.eiu.com/n/campaigns/europe- outlook-2023/. Economist Intelligence Unit, Asia outlook 2023 , December 2022b, “Mixed prospects for regional heavyweights” , https://www.eiu.com/n/campaigns/asia-outlook-2023/. European Central Bank, Opinion of the European Central Bank on a proposal for a Council regulation establishing a market correction mechanism to protect citizens and the economy against excessively high prices (CON/2022/44), 2 December 2022, https:// www.ecb.europa.eu/pub/pdf/other/en_con_2022_44_f_sign~6183314e58.en.pdf. European Central Bank, “Inflation perceptions and expectations”, 7 December 2022, https://www.ecb.europa.eu/stats/ecb_surveys/consumer_exp_survey/results/html/ ecb.ces_results_december_2022_inflation.en.html#_Inflation_expectations_three.

26 Chief Economists Outlook European Commission, “EU action to address the energy crisis”, November 2022, https://commission.europa.eu/strategy-and-policy/priorities-2019-2024/european- green-deal/eu-action-address-energy-crisis_en. FedEx, FedEx Corp. Reports First Quarter Results, 22 September 2022, https://newsroom. fedex.com/newsroom/global-english/fedex-corp-reports-first-quarter-fy23-results. FedEx, FedEx Corp. Reports Second Quarter Results, 20 December 2022, https://newsroom.fedex.com/newsroom/global-english/fedex-corp-reports-second- quarter-results-fy23. Food and Agriculture Organization of the United Nations, Food Price Index, November 2022, https://www.fao.org/worldfoodsituation/foodpricesindex/en/. Gabriel, Ricardo Duque, Klein, Mathias, Pessoa, Ana Sofia, “The Political Costs of Austerity”, 22 July 2022, https://papers.ssrn.com/sol3/papers.cfm?abstract_ id=4160971. Goldman Sachs, China 2023 Outlook , 17 November 2022, “After Winter Comes Spring” , https://www.goldmansachs.com/insights/pages/gs-research/china-outlook-2023- after-winter-comes-spring/report.pdf. Government of France, Energy sobriety plan (Plan de sobriété énergétique), 6 October 2022, https://www.ecologie.gouv.fr/sites/default/files/dp-plan-sobriete.pdf. Hart, Connor, “Don’t Expect Big Consumer Brands to Lower Prices Soon”, The Wall Street Journal , 26 July 2022, https://www.wsj.com/articles/dont-expect-big-consumer- brands-to-lower-prices-soon-11658858815. Intel, Intel Reports Third-Quarter 2022 Financial Results News Release, 27 October 2022, https://d1io3yog0oux5.cloudfront.net/_8eadd377a2684d9999b27d704fd3e0f2/ intel/news/2022-10-27_Intel_Reports_Third_Quarter_2022_Financial_1586.pdf. International Energy Agency, “Even with gas storage at 90%, the European Union would face heightened risk of supply disruptions if there is a complete Russian cut-off”, 26 October 2022, https://www.iea.org/data-and-statistics/charts/even-with- gas-storage-at-90-the-european-union-would-face-heightened-risk-of-supply- disruptions-if-there-is-a-complete-russian-cut-off. International Energy Agency, World Energy Outlook 2022 , November 2022, https://iea.blob.core.windows.net/assets/830fe099-5530-48f2-a7c111f35d510983/ WorldEnergyOutlook2022.pdf. International Labour Organization, Global Wage Report 2022-23 , November 2022, “The impact of COVID-19 and inflation on wages and purchasing power” , https://www.ilo.org/digitalguides/en-gb/story/globalwagereport2022-23#intro.

27 Chief Economists Outlook International Monetary Fund, Smaller Economies in Latin America and Caribbean Face a Bigger Inflation Challenge , 19 September 2022, https://www.imf.org/en/News/ Articles/2022/09/16/CF-Smaller-Economies-in-Latin-America-and-Caribbean-Face- a-Bigger-Inflation-Challenge. International Monetary Fund, World Economic Outlook Report , October 2022a, “Countering the Cost-of-Living Crisis” , https://www.imf.org/en/Publications/WEO/ Issues/2022/10/11/world-economic-outlook-october-2022. International Monetary Fund, Fiscal Monitor , October 2022b, “Helping People Bounce Back” , https://www.imf.org/en/Publications/FM/Issues/2022/10/09/fiscal-monitor- october-22. International Monetary Fund Data, Consumer Price Index (CPI), November 2022, https://data.imf.org/?sk=4FFB52B2-3653-409A-B471-D47B46D904B5. McKinsey, “Planning for 2023: How US-based businesses can succeed when capital and talent are constrained”, 16 December 2022, https://www.mckinsey.com/capabilities/ transformation/our-insights/planning-for-2023-how-us-based-businesses-can- succeed-when-capital-and-talent-are-constrained. Sgaravatti, Giovanni, Tagliapietra, Simone, Zachmann, Georg. “National policies to shield consumers from rising energy prices.” Bruegel , 29 November 2022, https://www. bruegel.org/dataset/national-policies-shield-consumers-rising-energy-prices. The Economist, “Is a white-collar recession looming?”, 4 December 2022, https://www. economist.com/business/2022/12/04/is-a-white-collar-recession-looming. The Economist, “High energy prices will hurt companies and consumers in 2023”, 18 November 2022, https://www.economist.com/the-world-ahead/2022/11/18/ high-energy-prices-will-hurt-companies-and-consumers-in-2023. The World Bank, Monthly Commodity Prices, 2 December 2022, https://thedocs.worldbank.org/en/doc/5d903e848db1d1b83e0ec8f744 e55570-0350012021/related/CMO-Pink-Sheet-December-2022.pdf. World Economic Forum, Chief Economists Outlook, September 2022, https://www.weforum.org/reports/chief-economists-outlook-sep-2022/. World Food Programme and Food and Agriculture Organization of the United Nations, Hunger Hotspots , September 2022, “FAOWFP early warnings on acute food insecurity October 2022 to January 2023 Outlook” , https://www.wfp.org/ publications/hunger-hotspots-fao-wfp-early-warnings-acute-food-insecurity- october-2022-january-2023.

28 Chief Economists Outlook Contributors The World Economic Forum would like to thank the members of the Community of Chief Economists for their thought leadership and guidance. We also thank the members of the broader core community of the Centre for the New Economy and Society for their ongoing commitment and contributions to addressing several of the factors presented in this outlook. Figures are based on 22 survey responses. We would like to thank in particular all community members who completed the survey and contributed to this edition of the Outlook through community discussions. We are grateful to our colleagues in the Centre for the New Economy and Society for helpful suggestions and comments, in particular to Philipp Grosskurth, Sriharsha Masabathula and Roberto Crotti in the Economic Growth, Revival and Transformation team. Thank you to Martha Howlett and Laurence Denmark for copyediting, graphic design and layout. The views expressed in this briefing do not necessarily represent the views of the World Economic Forum nor those of its Members and Partners. This briefing is a contribution to the World Economic Forum’s insight and interaction activities and is published to elicit comments and further debate. World Economic Forum Aengus Collins, Head, Economic Growth, Revival and Transformation, Centre for the New Economy and Society Kateryna Karunska, Insight Specialist, Economic Growth, Revival and Transformation, Centre for the New Economy and Society Saadia Zahidi, Managing Director, World Economic Forum and Head, Centre for the New Economy and Society

29 Chief Economists Outlook Acknowledgements Members of the Community of Chief Economists André Almeida, Sonae Mansueto Almeida, Banco BTG Pactual Shusong Ba, Hong Kong Exchange Rima Bhatia, Gulf International Bank Philipp Carlsson-Szlezak, Boston Consulting Group (BCG) Tomas Castagnino, Accenture Sami Chaar, Lombard Odier Long Chen, Luohan Academy/Alibaba Martin Coiteux, Caisse de Dépot et Placement du Québec Pedro Conceiçao, United Nations Development Programme (UNDP) Gregory Daco, EY-Parthenon Paul Donovan, UBS Bricklin Dwyer, Mastercard David Folkerts-Landau, Deutsche Bank Pierre-Olivier Gourinchas, International Monetary Fund Svenja Gudell, Indeed Jerome Haegeli, Swiss Re Jonathan Hall, Uber Ethan Harris, Bank of America Karen Harris, Bain & Company Janet Henry, HSBC Fernando Honorato Barbosa, Banco Bradesco Beata Javorcik, European Bank for Reconstruction and Development Nick Johnson, Unilever Ira Kalish, Deloitte Christian Keller, Barclays Steffen Kern, European Securities and Markets Authority Razia Khan, Standard Chartered Karin Kimbrough, LinkedIn Kyle Kretschman, Spotify Giulio Martini, Lord Abbett Mario Mesquita, Itaú Unibanco Guy Miller, Zurich Insurance Gilles Moëc, AXA Millan Mulraine, Ontario Teachers’ Pension Plan

30 Chief Economists Outlook Dirk-Jan Omtzigt, United Nations Office for the Coordination of Humanitarian Affairs (UN OCHA) Eric Parrado, Inter-American Development Bank Erik Peterson, Kearney Sandra Phlippen, ABN Amro Debora Revoltella, European Investment Bank Nela Richardson, ADP Santitarn Sathirathai, Sea Michael Schwarz, Microsoft Jorge Sicilia, BBVA Ludovic Subran, Allianz Areef Suleman, Islamic Development Bank Hal Varian, Google Eirik Waerness, Equinor Ghislaine Weder, Nestlé Coram Williams, Adecco

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