What Might Go Right Upside Risks For 2023 Economics

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Global Risks Outlook

Tom Orlik
Team: Economics
BE Chief Economist
1. What Might Go Right? Upside Risks for 2023: Economics
(Bloomberg Intelligence) -- After three years marked by Covid pandemic, Table of Contents
Ukraine war, and market turmoil it's tough to be optimistic about the outlook. Outlook
Bloomberg Economics' base case for 2023 is a lackluster 2.4% expansion in Majors
NEW
global GDP. That's the slowest - leaving aside the crisis years of 2009 and 2020 - EMEA
NEW
since 1993. Still, upside surprises are also possible. Asia
NEW
US inflation might disappear quicker than expected. A warm winter might help Europe dodge a
downturn. China’s exit from Covid Zero might be smoother than expected. Scroll through the screens
below for Bloomberg Economics look at a few things that might go right in the year ahead. (12/20/22)
Outlook
Majors
2. Avoiding a Hard Landing Depends on Inflation, Fed

Contributing Analysts
Anna Wong
(Economics) & Eliza Winger
(Economics)
While not our base case, we can envision a scenario in which the Federal Reserve opts to ease rates
in 2023, boosting the chances of a soft landing. One way that could happen is inflation falling faster
than expected. Currently, our baseline is for headline CPI to drop to 3.5% and the core to 3.8% by the
end of 2023. The most important assumption there is that energy prices remain flat next year from
2022.
In an alternative scenario, inflation fall faster as China's growth stumbles. A Bloomberg Economics
model attributes the recent fall in oil prices entirely to a drop in demand -- mainly from China. If
China’s growth falls off the cliff, perhaps amid a sharp rise in Covid cases and deeper property slump,
commodity prices could tumble sharply. (12/16/22)
Scenarios of CPI Inflation in 2023
Source: BLS, Bloomberg Economics
3. Late ‘Team Transitory’ Win May Scrap Euro-Area Recession

Jamie Rush
(Economics) & Maeva Cousin
(Economics)
The surge in inflation was the big surprise of 2022, triggering a brutal hiking cycle from the European
Central Bank. For 2023, sticky inflation and more hawkishness at central banks have been firmly
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Bloomberg® 12/21/2022 08:26:57

This document is being provided for the exclusive use of THAIS ALMEIDA at TITANIUM INVEST GESTAO DE INV LTDA. Not for redistribution.
priced in by markets. What if inflation catches everyone off guard again, but this time to the
downside?
A late victory for ‘Team Transitory’ may mean the ECB ends the tightening cycle early and traders
revise down their views on longer-term interest rates. Financial conditions would ease significantly.
For a sense of scale, SHOK, our in-house model of the euro-area economy shows that a 75-bp drop in
interest rate expectations could prevent a contraction in the first quarter of 2023, meaning a
technical recession is avoided. (12/16/22)
Avoiding a Technical Recession
Source: Bloomberg Economics
4. Could UK Households Spend All Fiscal Help? An Upside Risk

Dan Hanson
(Economics)
While a protracted, albeit shallow, recession is our base case, there is mounting evidence the UK may
hold up a little better than we assumed in our forecasts. Should strong demand buttress the job
market, that could mean households are more willing to spend government-provided energy aid. Our
forecast assumes only half of the £25bn of support is spent next fiscal year. But using a fiscal
multiplier of one means an extra £13bn could flow to the economy.
Our in-house model for the UK economy SHOK shows that if direct transfers are evenly disbursed
growth could be 0.4 percentage points higher in 2023, reducing the fall in annual GDP to 0.6% from
1%. The downside would be more monetary policy tightening, which would chop off 0.2 pts from
growth in 2024. (12/15/22)
Bigger Fiscal Multiplier Could Boost GDP Level By 0.5%
5. Swift End to Covid Zero Could Drive China 2023 Growth Up to 6.3%
Chang Shu
(Economics)
Our base case is for China's growth to rebound to 5.1% in 2023, lifted by an end to Covid Zero,
property support and a low base in 2022. That assumes reopening will be substantially complete by
mid-2023 - delivering a roughly 1.6 ppt boost to growth, spread over 2023 and 2024. A faster rollback
of Covid curbs could mean more of the benefits are felt in 2023, pushing growth as high as 6.3%.
The early signs suggest China is moving onto that faster track. Still, navigating the end of Covid Zero
will be perilous -- a surge in hospitalizations and deaths could yet prompt temporary reversals. For
Bloomberg® 12/21/2022 08:26:57

the rest of the world, stronger growth in China would be a mixed blessing, with higher commodity
prices adding an inflationary impulse. (12/16/22)
China Forecast: Scenarios
Source: NBS, Bloomberg Economics
6. Rising Costs, Global Slump Spell Downside Risk for Japan Growth
Yuki Masujima
(Economics)
Japan has avoided a recession in 2022 but risks to growth heading into 2023 mostly point down.
Surging costs of imported fuel, commodities, and food -- inflated by a weak yen -- are hurting profits
and driving up the cost of living. Weakening global demand is weighing on exports. Recessions in the
US and Europe could make matters worse. This is all reducing Japan Inc.'s willingness to invest and lift
wages -- undercutting consumption and the Bank of Japan's reflation effort.
That said, there is potential for a surprise to the upside. China’s rapid exit from Covid Zero could
boost demand for exports. A travel discount program will spur business in the service sector.
Subsidies to rein in electricity and gas utility bills will also ease pressure on households. (12/15/22)
Weak Yen Is Driving Japan CPI, Trade Deficit
Source: Ministry of Finance, Ministry of Internal Affairs and Communications,

Bloomberg Economics
EMEA
7. Italy’s Fiscal Stimulus May Further Boost Investment, Optimism

David Powell
(Economics)
Italy is probably sliding into a recession. We think the biggest risk to the outlook is that the ECB's rate
hikes continue to lift bond yields and Italy gets sucked into a sovereign debt crisis. However, after GDP
growth came in much higher than expected in 2Q and 3Q, the upside risks also need to be
considered. The Italian government has dedicated about €72 billion in 2022 to protect businesses
and households from the energy crisis. A separate spending package, mostly funded by Next
Generation EU, has also softened the blow.
Bloomberg® 12/21/2022 08:26:57

The money seems to have stimulated gross fixed capital formation -- that category of expenditure
has made the largest contribution to GDP growth since the start of the pandemic. A virtuous cycle of
higher investment spending and a lower budget deficit could significantly boost economic sentiment.
(12/13/22)
Investment Spending in Italy Jumps
Source: Destatis, Eurostat, Insee, Istat
8. Easing Supply Woes Could Give German Industry Shot in the Arm
Martin Ademmer
(Economics)
Germany's export-dependence and heavy reliance on Russian gas have left the country badly
exposed to global events. Our baseline forecast sees a shallow recession during the winter. Unusually
cold weather, reluctance to share gas within Europe, or a resurgence of the pandemic could
transform it into a considerable downturn.
Still, there are upside risks as well. Consumers have already shown a willingness to carry on spending
despite the hit to their disposable income -- private consumption might prove more robust than
expected. Moreover, China's reopening -- provided it doesn't lead to a new surge in energy prices for
Europe -- could also give the German industry a shot in the arm by freeing up constraints on supply
chains more quickly and hopefully boosting demand for exports. (12/15/22)
Supply Constraints Remain A Burden On Economy
9. Nuclear Progress, Households' Cash Could Keep France Growing

Maeva Cousin
(Economics)
France appears well placed to weather the shocks facing Europe in 2023. Households still have nearly
€150 billion extra cash from their pandemic savings and limited exposure to variable interest rates.
Low reliance on Russian gas should also have sheltered the country from the worst of the energy
crisis. But persistent issues with nuclear power generation have sent wholesale electricity prices
soaring and increased the risks of severe disruption -- underpinning our forecast for a mild recession
this winter.
Still, the situation at nuclear plants has started to improve. As of December 12, reactor availability
stood at 68%, up from 61% a week earlier, and daily power generation is recovering. A rapid return to
Bloomberg® 12/21/2022 08:26:57

normal conditions would boost industrial production and lift uncertainty, likely avoiding a recession.
(12/14/22)
French Nuclear Generation Recovers
Source: Bloomberg Intelligence
10. Can Momentum In Spain Be Brought Forward? An Upside Risk

Ana Andrade
(Economics)
Our baseline forecast sees Spain in recession going into 2023, with GDP dropping by 0.2% in 4Q22
and 1Q23. But what if a downturn is dodged? Even as households' budgets have been strained job
growth remains strong. And the economy could prove less sensitive to interest rate hikes.
In fact, there have been signs of resilience in high-frequency indicators. There’s also been recent
acceleration in the disbursement of EU funds. Taking the historic relationship between PMI and GDP at
face value shows growth could be running at 0.2% this quarter. Additionally, if we consider a scenario
wherein money trickles down to the economy earlier than we anticipate, momentum could be
brought forward to early 2023. Both those changes would leave growth 0.4 percentage points higher
next year, at 1.6%, and chop off 0.2pts from the 2024 figure. (12/15/22)
Spain Might Dodge a Recession
Source: Bloomberg Intelligence
11. Sweden’s Electricity Woes Will Get Worse But Won’t Last Long
Selva Bahar Baziki
(Economics)
With the uptick in power costs in November, it looks like higher energy costs are going to be straining
budgets for a while longer in Sweden this winter. Electricity prices have grown by 37% over the year
in November, and day-ahead prices for December so far point to even higher prices. To make matters
worse, unlike the episode in the summer, prices are increasing across all bidding areas, and could
pass through to higher overall prices.
However, Sweden’s electricity woes may be short-lived this time around. Shortages in power
generation -- with some ongoing since the summer -- will be alleviated in February at the latest as
scheduled maintenances and repairs are completed. Futures are also pointing to lower prices after
January. (12/15/22)
Bloomberg® 12/21/2022 08:26:57

Swedish Power Costs on a Rally
Source: Nord Pool, Bloomberg Economics
12. Russian Gas Deal May Lessen Turkey's External Financing Woes
Selva Bahar Baziki
(Economics)
Turkey has high exposure to currency risks both on the public and corporate sides and carries
relatively low currency reserves. Its current account balance is likely headed for a deficit in excess of
$40 billion. The nation's currency is down by 28.7% year-to-date -- despite back-door interventions we
estimate to equal $98 billion -- adding to its pain.
In this context, Turkey’s bid for a discount of more than 25% on gas payments to Russia will provide
much needed breathing room. The proposal aims to cover payments already made in 2022 as well as
future payments in 2023. This could put the discount at $11 billion for two years -- equivalent to 25%
of Turkey’s annualized current account deficit, year-to-date. The only risk? Presidents Erdogan and
Putin’s close relationship, which has its ups, but also downs. (12/16/22)
Turkey's Current Account Balance
Source: CBRT, Bloomberg Economics
Asia
13. US Soft Landing, China Covid Pivot May Lift Indonesia’s Growth
Tamara Mast Henderson
(Economics)
Indonesia should be able to sustain much of its growth momentum into 2023. Our baseline forecast
for a 5.2% expansion is driven by relatively resilient household spending and investment from
reopening that overcome weaker global demand. Upside risks to this projection stem from a possible
soft landing for the US economy or China's much-faster transition to living with Covid-19.
Either of these scenarios -- which would strengthen investor sentiment and boost capital inflows --
could push Indonesia’s growth above 5.5% next year. Also underpinned would be tourism, the prices
of Indonesia’s commodity exports and the rupiah. A stronger currency would allow Bank Indonesia to
pare back some of its rate hikes, further supporting growth. (12/12/22)
Bloomberg® 12/21/2022 08:26:57

Investment and Portfolio Flows
Source: Bank Indonesia, Indonesia Stock Exchange, Ministry of Finance Republic of

Indonesia
14. Less-Squeezed Trading Partner Offsets Malaysia's Political Risk

(Economics)
Our base case projection is for Malaysia to experience a sharp slowdown to 4.5% in 2023, largely
because of the base effect and the fading lift from reopening. This may prove too pessimistic if
Beijing's faster-than-expected pivot away from Covid-Zero keeps commodity prices firm and sustains
the expansion in Malaysia's exports. This would also likely spur positive spillovers for investment.
China is Malaysia's largest trading partner by a wide margin.
At home, November’s knife-edge general election failed to reduce political uncertainty, which tends
to subdue investment. Political fragmentation, though, also makes it difficult to slash public spending.
With the new prime minister pledging to support lower- and middle-income households, domestic
demand may also be stronger than expected. (12/14/22)
Gross Exports and Oil Prices
Source: Department of Statistics Malaysia, Bloomberg
15. Thailand's Returning Chinese Tourists Pose Upside Risks

(Economics)
Thailand's GDP growth rises by 0.3 percentage point in 2023 in our base case scenario, driven by a
more than doubling in tourism. If China's transition to living with Covid-19 goes more quickly than
envisioned, the expansion could top 4%. In our base case, the lift from Chinese arrivals is spread over
2H23 and 2024. China was Thailand's largest source of tourists before the pandemic. Visitors from
China accounted for 3% of arrivals in 2022 through October, compared with 28% in 2019.
The main downside risk to the outlook is if the global slowdown is more pronounced than expected.
This would bog down the recovery in tourism and incomes. A deep and prolonged US recession would
also derail exports and capital inflows. Click the Text tab for the full report. (12/16/22)
Bloomberg® 12/21/2022 08:26:57

Thai Visitor Arrivals – Waiting for China’s Return
Source: Bank of Thailand
16. Return of Chinese Tourists May Extend Philippine Recovery

(Economics)
Our baseline projection is for Philippine GDP growth to slow to 6% in 2023 from 7.4% in 2022, driven
by the base effect and the fading reopening boost. China's earlier-than-expected exit from Covid-
Zero, though, is an upside risk for merchandise exports and tourism. We estimate foreign arrivals in
October were about 40% below the pre-pandemic level, with about 95% of Chinese visitors yet to
return. Before Covid-19, China accounted for about one-fifth of Philippine tourists. Beijing's loosening
of border curbs should see this gap narrow quickly.
Downside risks to growth stem from persistent inflation that constrains household spending (the
primary growth engine), and more pronounced slowdowns in the US and Europe that sap investment
sentiment, overseas remittances and export receipts. (12/20/22)
Visitor Arrivals – Actual and Projected
Source: Philippine Statistics Authority (Actuals through 2019), Bloomberg

Economics (Estimates from 2020)
17. An Upside to India’s Recovery Is a Slow Reopening by China

Abhishek Gupta
(Economics)
Our base case sees India's GDP growth strengthening to 6% in fiscal 2024 from 4.9% in fiscal 2023 on
a seasonally adjusted quarter-on-quarter basis. We expect this structural recovery to be underpinned
by domestic impulses -- increased public capital expenditure, improved housing affordability,
subsidized manufacturing and new free-trade agreements. A slow China reopening would lift growth
by as much as 0.5 ppt above our baseline in fiscal 2024.
The reason -- reduced upward pressure on commodity prices could mean a less hawkish Federal
Reserve going forward and may even prompt the RBI to refrain from further rate hikes. Downside
risks to growth could surface if the US and Europe -- key export markets -- fall into extended
recessions, delaying the manufacturing recovery. (12/15/22)
Bloomberg® 12/21/2022 08:26:57

Low Commodity Prices to Sustain Public Capex Boost
Source: Ministry of Finance, Bloomberg Economics
18. Unconditional Aid From Allies Poses Upside to Pakistan's Growth

Ankur Shukla
(Economics)
Pakistan's GDP growth will likely slow to 0.3% in fiscal 2023 from 6% prior due to floods, aggressive
rate hikes, political turmoil and import restrictions. The central bank has limited imports to support FX
reserves while IMF aid is delayed. We don't think friendly nations will help out until the Fund's loan
arrives.
The government is in talks with Saudi Arabia for fresh loans. It has also requested China roll over its
debt. If the country's allies provide aid without waiting for the IMF disbursement, that would boost FX
reserves and allow the central bank to relax import restrictions. This would pose an upside risk to our
growth outlook. The major downside risk -- the government increases welfare spending to woo voters
in an election year, and the IMF responds by suspending aid. (12/15/22)
Pakistan's Funding Gap For Fiscal 2023
19. Faster Tourism Recovery Poses Upside Risk to Sri Lanka's Growth
Ankur Shukla
(Economics)
Sri Lanka's GDP will likely expand 4.7% in 2023, rebounding from a 6.5% contraction in 2022 on a
pickup in tourism, easing supply shortages and flattered by a low base. Tourist arrivals should be
higher but won't reach levels registered before the Easter bombings in 2019. Growth could exceed
our baseline if the tourism recovery is stronger than expected.
IMF aid likely to come early in 2023 will give the country more resources to increase imports of
necessities such as fuel. A rise in inbound visitors will also spell more dollar revenue that can be used
to address shortages. Russia and UAE have increased flights to Sri Lanka. If more countries follow, the
tourism boost could be bigger. The main downside risk to 2023 growth is a delay in IMF assistance.
(12/15/22)
Bloomberg® 12/21/2022 08:26:57

Sri Lanka's Tourism Arrivals Far Below 2018 Levels
20. Faster Tourism Rebound May Push Hong Kong 2023 Growth Toward 3%
Eric Zhu
(Economics)
Our base case for Hong Kong growth to rebound to 2.3% in 2023 rests on China relaxing its Covid
curbs -- allowing mainland tourists to visit the city again by mid-2023. Faster border reopening would
pull the growth boost forward. We estimate a return of mainland tourists in 2Q23 could lift growth
closer to 3%.
Reports that China will start allowing quarantine-free travel for Hong Kong residents in January point
to a speedy move. It’s not clear if the initial relaxation would apply to tourism. Either way, it would be
a big step back toward the pre-Covid normal. The next steps - China will need to reopen tourism
travel to the city and further loosen its quarantine requirements for arrivals. (12/14/22)
Hong Kong Recovery Needs Tourism Revival
Source: Census and Statistics Department Hong Kong
To contact the analyst for this research:

Tom Orlik at [email protected]
Bloomberg® 12/21/2022 08:26:57

What Might Go Right Upside Risks For 2023 Economics

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Global Risks Outlook

1. What Might Go Right? Upside Risks for 2023: Economics

2. Avoiding a Hard Landing Depends on Inflation, Fed

Scenarios of CPI Inflation in 2023

Source: BLS, Bloomberg Economics

3. Late ‘Team Transitory’ Win May Scrap Euro-Area Recession

Bloomberg® 12/21/2022 08:26:57

Avoiding a Technical Recession

Source: Bloomberg Economics

4. Could UK Households Spend All Fiscal Help? An Upside Risk

Bigger Fiscal Multiplier Could Boost GDP Level By 0.5%

Source: Bloomberg Economics

Bloomberg® 12/21/2022 08:26:57

China Forecast: Scenarios

Source: NBS, Bloomberg Economics

Weak Yen Is Driving Japan CPI, Trade Deficit

Source: Ministry of Finance, Ministry of Internal Affairs and Communications,

7. Italy’s Fiscal Stimulus May Further Boost Investment, Optimism

Bloomberg® 12/21/2022 08:26:57

Investment Spending in Italy Jumps

Source: Destatis, Eurostat, Insee, Istat

Supply Constraints Remain A Burden On Economy

Source: Bloomberg Economics

9. Nuclear Progress, Households' Cash Could Keep France Growing

Bloomberg® 12/21/2022 08:26:57

French Nuclear Generation Recovers

Source: Bloomberg Intelligence

10. Can Momentum In Spain Be Brought Forward? An Upside Risk

Spain Might Dodge a Recession

Source: Bloomberg Intelligence

Bloomberg® 12/21/2022 08:26:57

Swedish Power Costs on a Rally

Source: Nord Pool, Bloomberg Economics

Turkey's Current Account Balance

Source: CBRT, Bloomberg Economics

Bloomberg® 12/21/2022 08:26:57

Investment and Portfolio Flows

Source: Bank Indonesia, Indonesia Stock Exchange, Ministry of Finance Republic of

14. Less-Squeezed Trading Partner Offsets Malaysia's Political Risk

Gross Exports and Oil Prices

Source: Department of Statistics Malaysia, Bloomberg

15. Thailand's Returning Chinese Tourists Pose Upside Risks

Bloomberg® 12/21/2022 08:26:57

Thai Visitor Arrivals – Waiting for China’s Return

Source: Bank of Thailand

16. Return of Chinese Tourists May Extend Philippine Recovery

Visitor Arrivals – Actual and Projected

Source: Philippine Statistics Authority (Actuals through 2019), Bloomberg

17. An Upside to India’s Recovery Is a Slow Reopening by China

Bloomberg® 12/21/2022 08:26:57

Low Commodity Prices to Sustain Public Capex Boost

Source: Ministry of Finance, Bloomberg Economics

18. Unconditional Aid From Allies Poses Upside to Pakistan's Growth

Pakistan's Funding Gap For Fiscal 2023

Source: Bloomberg Economics

Bloomberg® 12/21/2022 08:26:57

Sri Lanka's Tourism Arrivals Far Below 2018 Levels