Opportunities on the Horizon: Investing Through a Slowing Economy

Overview | WEALTH OUTLOOK 2023 | MID-YEAR EDITION | 15 We believe the full economic effects of the Fed’s tightening and the retrenchment of bank lending have not fully played out in the economy. When the Fed met in May, it raised policy rates to 5.125% and continued quantitative tightening (QT). This was despite the US Index of Leading Economic Indicators already being down 8% ( FIGURE 8 ) . While the economy and Fed policy appear to be on a collision course, pent-up demand and momentum from the post-COVID rebound have meant a stronger US economy than we first anticipated in 2023. Adding to the momentum has been China’s earlier-than- expected reopening plus fading war-induced energy shocks. Taking into account all these developments, we’ve revised our 2023 growth forecasts slightly upward ( FIGURE 9 and see our Regional Preview ). Dragging on our 2023 and 2024 outlook, however, are the impacts of greater-than- expected policy tightening as the Fed confronts “labor hoarding” by employers in the US. This suggest that the negative impact from tightening has simply been pushed to a later date ( FIGURE 10 ) . Our US real GDP forecast for 2023 has been raised to 1% from0.5%, but we have cut our 2024 forecast to 1.4% from 2.1%. The slowest period for the US economy is likely to come in either 2023 or the beginning of 2024. Together, these two years are likely to show below trend growth until the US economy rebuilds “slack” and US monetary policy eases. For now, the US continues to reflect its major difference in government policies pre- and post-COVID versus China’s policy-induced hard landing and rapidly rising unemployment ( FIGURE 11 ) . FIGURE 8 : US Index of Leading Economic Indicators Year-Over-Year -25 -20 -15 -10 -5 0 5 10 15 20% '70 '75 '80 '85 '90 '95 '00 '05 '10 '15 '20 Y/Y% Change Recession US Leading Economic Indicators Source: Haver Analytics as of May 11, 2023. Gray areas are US recessions. Indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the performance of any specific investment. Index returns do not include any expenses, fees or sales charges, which would lower performance. Past performance is no guarantee of future results. Real results may vary. FIGURE 9 : Citi Global Wealth Investments GDP Forecasts AS OF MAY 2023 (PREVIOUS ESTIMATES ARE IN PARENTHESIS ) 2020 2021 2022 2023 2024 China 2.4 7.5 3.0 5.8 (5.5)  4.5 (4.2)  US -3.4 5.7 2.0 1.0 (0.5)  1.4 (2.1)  EU -6.3 5.4 3.6 0.8 (0.0)  1.1  UK -11.0 7.6 4.1 0.3 (-0.5)  1.1  Global -3.2 5.7 3.4 2.5 (2.0)  2.4 (2.4) Source: Haver Analytics and Citi Global Wealth Investments as of May 2023. All forecasts and expressions of opinion are subject to change without notice, and are not intended to be a guarantee of future events. Indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the performance of any specific investment. Index returns do not include any expenses, fees or sales charges, which would lower performance. Past performance is no guarantee of future results. Real results may vary.