Economics Docs 2022 184258.ashx

The UniCredit
Macro & Markets

2023-24 Outlook
Macro Research 17 November 2022

Strategy Research
“ Go for carry as central banks approach peak rates
”
■ Macro: We forecast a mild technical recession in both the US and the eurozone, followed by a below-trend recovery.
Inflation is set to decelerate meaningfully in 2023. The Fed and the ECB are likely to finish their tightening cycle by
early next year and to start cutting rates in 2024.
■ FI: Long-dated yields are likely to be close to their peaks. Convincing signals that inflation is easing will give central
banks a green light to rein in some of the recent tightening, leading to a bull market revival and curve steepening.
■ FX: The USD is set to further loosen its grip, but its strength is unlikely to be fully reversed. By the end of our
forecast horizon, we expect EUR-USD to climb to 1.10-1.12 and we see GBP-USD back above 1.20, USD-JPY
below 135 and USD-CNY down to 6.90. We remain bearish on the CEE3 currencies, the TRY and the RUB.
■ Equities: Following a volatile sideways movement early in the year, equities have potential to rise by about 10% in
2023, primarily supported by valuation expansion. Earnings growth should be flat and is unlikely to accelerate before
2024. Our 2023 year-end index targets are Euro STOXX 50 4200, DAX 15500 and S&P 500 4300 index points.
■ Credit: We expect a solid year in European credit – both in financials and non-financials – though spread tightening
is likely to take place only in 2H23. Lower tiers of the capital structure and high yield are likely to outperform, mainly
thanks to high carry. We prefer HY NFI and Bank AT1s over IG seniors.
■ ESG: Greeniums are set to move sideways or richen moderately as strong demand for ESG assets outpaces new
issuance. Policy initiatives and the transforming energy landscape will support interest in the asset class.
Link to webcast Link to presentation
Editors: Marco Valli, Global Head of Research (UniCredit Bank, Milan)

Dr. Luca Cazzulani, Head of Strategy Research (UniCredit Bank, Milan)
Elia Lattuga, Deputy Head of Strategy Research (UniCredit Bank, Milan)
Chiara Silvestre, Economist (UniCredit Bank, Milan)
November 2022 Macro & Strategy Research
Macro & Markets Outlook
Contents
3 Executive Summary
4 Global: Mild recession, weak recovery
8 US: Fed to stop hiking in the spring, cut in 2024
10 Eurozone: Economic slack to support disinflation path
12 Germany
14 France
16 Italy
18 Spain
19 Austria
20 CEE: Weathering geopolitical and economic shocks
26 UK: The sick man of Europe
28 Sweden & Norway: Tight monetary policy set to weigh on growth
29 Switzerland: SNB to hike twice more
30 China: A challenging environment
31 Oil: Brent prices to remain elevated
32 Natural Gas: A challenging, but surmountable, winter lies ahead
33 Cross Asset Strategy: Stay with bonds for carry
36 FI Strategy
36 USTs: the year of the bull-market revival
37 Eurozone: lower yields, flattish curve
40 BTPs caught between high supply, QT and peaking policy rates
41 Supranationals facing high net supply and QT
42 FX Strategy: A lower USD, but not a complete reversal of its strength
48 Equity Strategy: 2023 – a year of transition to a more-stable upward trend
53 Credit Strategy
53 Non-Financials: favoring lower capital tiers and HY
55 Financials: senior and sub spreads to tighten in 2023, but some
spread pressure on covered bonds
57 ESG: greeniums should remain intact despite rising supply
58 Table 1: Annual macroeconomics forecasts

59 Table 2: Quarterly GDP and CPI forecasts
59 Table 3: Oil forecasts
60 Table 4: Comparison of annual GDP and CPI forecasts
61 Table 5: FI forecasts
62 Table 6: FX forecasts
63 Table 7: Risky assets forecasts
Editorial deadline: 16 November 2022 18:00 CET
UniCredit Research page 2 See last pages for disclaimer.

Executive Summary
Marco Valli, ■ The global economy faces increasing headwinds as the largest, fastest and most
Global Head of Research,
Chief European Economist synchronized tightening of global monetary policies in decades compounds the effects of
(UniCredit Bank, Milan) big terms-of-trade shocks in several countries and high inflation. Unfavorable geopolitics
+39 02 8862-0537
adds to uncertainty, mainly because of tensions between the West and Russia and China.
marco.valli@unicredit.eu
We expect global GDP to rise by only 1.9% in 2023, a de facto recession. Risks are tilted
to the downside.
■ We see GDP growth in both the US (-0.1%) and the eurozone (0.0%) stagnating in 2023,
with a technical recession in eurozone at the turn of the year and in the US in 1H23.
Supportive fiscal policy in the eurozone, tight labor markets, reasonably healthy private-
sector balance sheets and a further easing of bottlenecks should prevent a deep slump. In
the eurozone, Germany and Italy are likely to be more affected by the current energy crisis
and downturn in the manufacturing sector, while France and Spain will probably perform
slightly better. Due to the lag in the impact of monetary policy and delayed softening of the
labor market, we expect a below-trend recovery in 2024 both in the US (0.9%) and the
eurozone (1.0%). The UK is facing a sequence of large supply shocks that are damaging
its growth outlook. China’s growth is likely to reaccelerate, but its path should remain
bumpy as the country struggles to emerge from the pandemic and a real-estate downturn.
■ Inflation in the US (mainly demand-pull) remains fundamentally different from that in

developed Europe (predominantly cost-push). That said, the disinflation pattern penciled
into our forecasts follows common trends in underlying inflation on both sides of the
Atlantic. Core-goods prices decelerate first, amid post-pandemic consumption shifts and
rate hikes affecting durable-goods consumption. Service-price inflation will fade more
slowly, especially in the US. So far, firms’ profitability has been resilient. Demand
compression, which central banks are keen to accelerate, will likely put pressure on profit
margins, slowing CPI growth. We see inflation declining to around 3% in the US and 2.5%
in the eurozone by the end of 2023, and to 2% by mid-2024.
■ Central banks are fighting hard for their credibility and will probably want to keep financial
conditions tight until they feel very confident inflation is on its way to target. We see policy
rates peaking at 5% in the US and at 2.75% in the eurozone. The ECB’s quantitative
tightening will likely initially involve a reduction of the APP portfolio by about EUR 15bn per
month. We expect to see a turning point in monetary policy in 2024, with the Fed cutting
rates by a cumulative 150bp and the ECB by 75bp.
■ In CEE countries belonging to the EU (EU-CEE), GDP is expected to grow by 0.4% in

2023 and by around 3% in 2024. We forecast a technical recession in the coming quarters,
followed by a rebound in 2H23. Russia’s recession could deepen to -5% next year,
followed by a recovery to around 2.5% in 2024 if there is gradual improvement in
aggregate supply. In EU-CEE, inflation is likely to remain outside target ranges throughout
our forecast horizon, limiting the scope for rate cuts by the end of 2024.
■ After the recent rally in risky assets, we suggest entering 2023 with a more defensive
allocation, preferring fixed income to equities and developed to emerging market exposure.
Bonds offer attractive carry and better risk-adjusted return prospects, while equities will
face weak profitability and initially little tailwinds from valuations. At end-2023, we target
3.75% for the 10Y UST yield, 2% for the 10Y Bund yield and 2.50% for the 10Y EUR swap.
We like IG and HY credit in Europe and retain a cautious view on duration. However,
peaking policy rates and signs of economic recovery should pave the way for more risk-
taking in 2H23. In FX, the main story is likely to be a correction of USD strength, although
the speed of the latest move is probably excessive. We expect EUR-USD to be back to
1.10-1.12 by the end of our two-year forecast horizon. USD-JPY will likely extend its slide
below 135, while we do not see much downside potential for USD-CNY below 7.00. We
are bearish on the CEE3 currencies (PLN, HUF and CZK), the TRY and the RUB.

Global
Mild recession, weak recovery
Daniel Vernazza, PhD, ■ We forecast global GDP growth of 1.9% next year – a de facto global recession – followed
Chief International Economist
(UniCredit Bank, London) by a weak recovery in 2024 of 2.6%.
+44 207 826-7805
daniel.vernazza@unicredit.eu ■ A technical recession in the eurozone at the turn of the year, and the US shortly after, is
likely, followed by below-potential growth in 2024. China’s growth is set to remain bumpy
and subdued. We see the Fed and the ECB overtightening policy, stopping interest rate
hikes in 1Q23, and cutting rates in 2024.
■ The risks to growth are skewed to the downside, including from negative geopolitical
developments, greater persistence in wage and price setting, and financial stability risks.
1. Baseline forecasts
A de facto global recession… We expect global GDP growth to slow to 1.9% in 2023 before modestly picking up to 2.6% in
2024. Global growth has fallen below 2% (a de facto global recession) only four times in the
last fifty years, in 1974-5, 1981-82, 2009 and during the COVID-19 pandemic in 2020 (Chart
1). Inflation is at or near multi-decade highs in many economies. In response, central banks
are aggressively tightening monetary policy and are set to overtighten. In judging that the
risks of doing too little tightening are greater than doing too much, central banks are
increasingly focused on backward-looking data, unwilling to wait for the lags in the effects of
monetary policy, and probably underestimating the amplifying effects of synchronized
tightening across many countries. This, along with the squeeze in real incomes, particularly in
those countries facing a large terms-of-trade shock, not least in Europe (Chart 2), will likely tip
the global economy into recession next year. China’s growth path is likely to remain bumpy
and subdued due to its zero-COVID strategy and vulnerabilities stemming from its
overleveraged housing market. Other major emerging markets have seen limited capital
outflows so far, but this is largely due to a substantial tightening of monetary policy, which will
slow the economy. Energy-exporting countries will continue to benefit from high prices.
… but it should be mild Assuming central banks acknowledge the damage to growth and inflation and stop rate hikes
in early 2023, the global recession should be mild and rate cuts are likely in 2024. The buffer
from strong household balance sheets, tight labor markets and scope for further improvement
in the supply-side should prevent a deeper recession. Growth will likely pick up in 2024, as
inflation eases, but to below-potential rates given the lagged effects of monetary policy.
Inflation likely to fall back next We see headline inflation declining to around 3% in the US and 2.5% in the eurozone at the
year
end of 2023, and to 2% by mid-2024. The fall in inflation is driven by a stabilization of energy
prices, lower aggregate demand, and some further improvement in supply capacity.
CHART 1: A MILD RECESSION AHEAD CHART 2: VARYING TERMS OF TRADE SHOCKS
Global real GDP growth, % yoy Change in the relative price of imports to output, 4Q19-2Q22, pp.
8
Japan
Forecast
6 Spain
Italy
4
France
2 Eurozone
Germany
0
UK
-2 US
Canada
-4
Norway
70 73 76 79 82 85 88 91 94 97 00 03 06 09 12 15 18 21 24
-20 -10 0 10 20 30 40
Source: IMF, OECD, World Bank, UniCredit Research

2. Key judgements and risks

1. Central banks will likely Central banks have responded to high inflation by aggressively tightening monetary policy
overtighten
and are unlikely to stop until core inflation shows a string of lower readings. We expect further
rate hikes by the Fed and the ECB, but at a slower pace, to a peak of 5% and 2.75%,
respectively, in March 2023. The relative extent of cumulative tightening reflects differences in
the source of the shock. In the US, high inflation is mainly a problem of excess demand,
driven by excessively loose fiscal and monetary policy during the pandemic, requiring a more
forceful monetary policy response. In contrast, Europe faces a very large negative terms-of-
trade shock, mostly due to energy imports, and the associated fall in real incomes will bring
inflation down over time.
In our view, central banks are likely to overtighten policy. First, there are long lags in the
monetary policy transmission, from financial conditions to output, and from output to inflation,
with the full effect on inflation apparent some 18-24 months after the interest rate change.
Second, policy has progressively put more weight on actual data, rather than forecasts of
inflation. Given the lags, policy will fall behind the curve. In the US, for example, surveys show
new private rents are falling, but official average CPI rent inflation continues to accelerate as it
reacts with a long lag (Chart 3). Third, central banks judge that the risks of doing too little
tightening are greater than the risks of doing too much. The Fed’s view is based on the
experience of the US in the 1970s, when it made several failed attempts to bring inflation
down, and inflation expectations became de-anchored. We see little or no sign of this
happening, and we expect rate cuts in 2024.
2. Labor market to lag The labor market is very tight in the US and, to a lesser extent, in the eurozone. In the US
there are almost two job openings for every unemployed person, well above the pre-pandemic
level of 1.2. We judge that a softening of the labor market is likely to take a little longer than
usual to materialize following the slowdown in economic activity. Indeed, given the shortages
of labor to meet current demand, there is room for a further softening of demand before it
materially impacts hiring and firing. We note that US firms have reduced average weekly
hours, almost back to pre-pandemic levels, before reducing headcount. We expect the labor
market to soften and unemployment to rise from 1H23.
CHART 3: US NEW RENTS FALLING, OFFICIAL RENTS LAG CHART 4: LONG-RUN INFLATION EXPECTATIONS ANCHORED
US actual and expected inflation, % yoy

% yoy
20 10.0
CPI: Rent of primary residence Actual inflation 1-yr ahead inflation expectations Longer-run inflation expectations
Zillow Observed Rent Index 8.0

15
Apartment List National Median Rent
Latest
6.0 2001-07 average
10 2012-19 average
4.0
5
2.0
0 0.0
-5
Jan-15 Jul-16 Jan-18 Jul-19 Jan-21 Jul-22
Note: CB=Conference Board, UoM=University of Michigan, FRBONY=New York Fed, SPF=Survey of Professional Forecasters
(Phili Fed)
Source: Apartment List, Bloomberg, BLS, CBO, NY Fed, Philadelphia Fed, University of Michigan, Zillow, UniCredit Research

3. Price and wage setting We do not foresee a wage-price spiral, for three main reasons: falling real incomes, tighter
monetary policy, and longer-term measures of inflation expectations that remain well
anchored (Chart 4). That households, firms and markets believe high inflation will not be long
lasting means it likely will not be. Nominal wage growth is showing signs of moderating in the
US. In the eurozone, nominal wage growth is likely to accelerate, but a softening of the labor
market, weakening aggregate demand, and lower inflation should mean it is short-lived. As
inflation eases, short-term measures of inflation expectations are likely to fall back too.
Nominal wage growth is particularly important for core services prices, due to the large share
of labor in total input costs. There is uncertainty surrounding the extent of second-round
effects from high inflation to wages, as workers seek compensation for high current and
expected short-term inflation, particularly given the expected lag from slowing demand to
labor market weakness. Once we see a significant softening of the labor market, which we
expect in 1H23, core services inflation will likely ease.
4. Profit margin compression An important driver of high current inflation has been the ability of firms to more than pass on
input price rises to their customers, increasing profit margins. This rate of pass-through of
higher input costs has been greater than historical averages, likely reflecting the large stock of
household excess savings supporting nominal spending growth, while firms report that they
cannot find enough labor to meet current demand. We expect profit margins to compress
once the labor market softens, while the drawdown of (highly unevenly distributed) excess
savings is likely to slow, judging by surveys of consumer attitudes indicating households are
cutting non-essential spending.
5. Core goods disinflation Global core goods inflation surged during the pandemic due to expenditure-switching towards
goods, particularly in the US, and impaired supply chains made worse by the Russia-Ukraine
conflict. There is clear evidence that these effects are fading. Spending is rotating back
towards services and away from goods, notably in the US, and higher interest rates and
economic uncertainty are weighing on durable-goods spending. Meanwhile, measures of
supply-chain constraints (for example, the New York Fed’s Global Supply Chain Pressure
Index in Chart 5, as well as suppliers’ delivery times and shipping costs) have improved
markedly, although they are not fully back to their pre-pandemic levels. PMI manufacturing
price indices are off their peaks, PPI inflation for intermediate core goods is falling in the US
and eurozone, and US CPI core goods inflation is declining (Chart 6). We expect core goods
deflation in the US, and disinflation in the eurozone, next year, in part due to further
improvement in supply-chain constraints. We have assumed China will keep its zero-COVID
strategy, but if we are wrong then this would further help the supply side.
CHART 5: GLOBAL SUPPLY-CHAIN PRESSURE HAS EASED CHART 6: CORE GOODS DISINFLATION IN US
Core goods Core services Core services excluding shelter

Global Supply Chain Pressure Index, normalized
5.0 CPI, % yoy
14.0
4.0 12.0
3.0 10.0
8.0
2.0
6.0
1.0
4.0
0.0 2.0
-1.0 0.0
-2.0
-2.0
Oct-12 Oct-14 Oct-16 Oct-18 Oct-20 Oct-22 -4.0
Oct-15 Oct-16 Oct-17 Oct-18 Oct-19 Oct-20 Oct-21 Oct-22
Source: BLS, NY Fed, UniCredit Research

6. Commodity prices stabilize The inflation and growth outlook is sensitive to commodity prices, particularly in Europe,
next year, fall in 2024
where around two-thirds of the inflation overshoot is accounted for by the direct and indirect
effects of energy and food prices. Commodities prices have fallen from their peaks (Charts 7
and 8), in part reflecting weaker GDP growth expectations and high European natural gas
storage levels. We have based our forecasts on the assumption that the Brent oil price will
rise slightly above USD 100/bbl over the winter before declining back to USD 95/bbl by end-
2023 and USD 90/bbl by end-2024. There is uncertainty surrounding the impact of the G7
price cap on Russian oil due to come into effect in December. For other commodities prices,
including natural gas, we have followed futures price curves. For European natural gas, the
futures curve sees prices broadly flat next year before falling in 2024. As energy prices
stabilize, inflation will ease due to negative base effects in the year-on-year comparison.
7. Financial stability risks The higher interest-rate environment and tighter financial conditions have increased risks to
financial stability. Importantly, we do not expect a systemic crisis, because household and
corporate balance sheets are generally in good shape and the global banking sector is well
capitalized. House prices are likely to correct to the downside, but a crisis seems unlikely given
the large price gains of recent years, the higher share of fixed-rate mortgages and the relative
resilience of the labor market.
Still, it seems unlikely that the global impact of unprecedentedly fast and synchronized policy
tightening will be smooth. While the banking sector is well capitalized, regulation of the non-bank
financial sector has fallen short. Following a period of extreme volatility in the UK gilt market, the
BoE had to buy long-dated UK government bonds to prevent a number of UK pension funds
from collapsing. Uncertainty surrounding the economic and monetary policy outlook has led to
poor liquidity conditions across many markets, which could amplify the impact of disorderly
market functioning. There remain considerable risks in China’s overleveraged property sector.
8. Geopolitical risks Geopolitical tensions are likely to continue, mainly from the conflict in Ukraine and strategic
competition between the US and China. There have been some encouraging signs. Russia’s
military retreat from Kherson in Ukraine raises hope that this is the beginning of the end of the
conflict. Still, a missile that crashed inside Poland on 16 November, thought to be a stray, shows
there is a high risk of an accident. US President Joe Biden and China’s President Xi Jinping met
face-to-face on the sidelines of the G20 meeting in Indonesia, both stating their opposition to the
use of nuclear weapons, a message clearly aimed at Russian President Vladimir Putin, and
raising hope of some stabilization in the relationship between the world’s only two superpowers.
A further deterioration in geopolitics cannot be excluded, which could see further rises in
commodities prices, disruption to trade and supply chains, and a spike in risk aversion weighing
on the prices of risky assets. In such a situation, the job of central banks would become even
more difficult.
CHART 7: COMMODITIES PRICES HAVE EASED CHART 8: NATURAL GAS FUTURES STABILIZE AFTER WINTER
Industrial metals prices Brent oil spot price Agricultural prices Natural gas prices, index 4Q19=100
2000
Index 4Q19=100 Futures prices
220 Europe US
200 1600
180
160 1200
140
120 800
100
80 400
60
0
40
Dec-17 Dec-18 Dec-19 Dec-20 Dec-21 Dec-22 Dec-23 Dec-24
20 Note: Futures prices are the 15-day average up to 11 November 2022 (solid lines) and the 15-day
Nov-18 Nov-19 Nov-20 Nov-21 Nov-22 average up to 12 August 2022 (dashed lines).
Source: Bloomberg, UniCredit Research

US
Fed to stop hiking in the spring, cut in 2024
Daniel Vernazza, PhD, ■ We expect GDP growth to broadly stagnate next year, as cumulative monetary tightening
(UniCredit Bank, London) takes its toll, followed by a modest recovery in 2024.
+44 207 826-7805
daniel.vernazza@unicredit.eu
■ The Fed will likely hike the target range for the federal funds rate to 4.75-5.00% by the end
of 1Q23 and then stop. A series of rate cuts is likely to begin in early 2024.
Slowdown in train The US economy will likely broadly stagnate in annual growth terms next year (-0.1%) and
post a modest recovery in 2024 (0.9%). We see zero growth in 4Q22, followed by a mild
recession lasting for two quarters in 1H23, with a peak-to-trough fall in GDP of 0.5%, and then
slight growth in 2H23 (Chart 1). Higher interest rates and a squeeze in real incomes have
slowed output growth. Excluding the effects of volatile net exports and changes in inventories,
the economy grew at an annualized rate of 0.5% in 3Q22, down from 0.7% in 1H22 and 1.9%
in 2H21. The impact of tighter financial conditions is visible in the interest-rate sensitive parts
of the economy, particularly in housing and durable goods. Thirty-year mortgage rates have
risen to 7% from just over 3% at the end of last year. Mortgage applications, sales and
housing starts have slumped, and house prices have fallen for two consecutive months. Given
the lag in the transmission of monetary policy, the full effects of monetary tightening on output
are likely to materialize next year, and on inflation even later.
Personal consumption is Personal consumption growth has slowed but has remained positive, largely because
expected to slow
households have drawn from excess savings, which are almost 20% lower than their peak at
the end of last year (Chart 2). While it is still equivalent to 8% of GDP, it is highly unevenly
distributed, and the lowest income quintile has exhausted savings buffers. This is likely to
mean that consumer spending will slow further in the coming quarters, in closer alignment
with real incomes, which is also indicated by consumer surveys of spending intentions.
Labor demand is projected to The economy continues to face demand-supply imbalances, particularly in the labor market
come into better balance with
supply (Chart 3). There are signs of softening labor demand, with vacancies off their peak. Nominal
wage growth has eased somewhat, but at over 4% it is still too high to be consistent with the
Fed’s inflation target. High nominal wage growth reflects the very tight labor market and
compensation for high current and expected short-term inflation. Importantly, nominal wage
growth has stayed materially below current inflation and is showing few signs of wage-price-
spiral dynamics, while longer-term measures of inflation expectations remain well anchored.
As the labor market softens and inflation eases, nominal wage growth should ease too.
CHART 1: MILD RECESSION, MODEST RECOVERY CHART 2: EXCESS SAVINGS HAVE FALLEN
GDP qoq (%, non-annualized) GDP yoy (%, rs) Excess savings Monthly personal saving Monthly average saving 2018-19
2.5 15
USD bn
600
Total stock of excess savings =
2.0 USD 2.1tn (8% of GDP)
500
Forecast 10
1.5 400
300
1.0 5
200
0.5
100
0
0.0 0
Sep-18 May-19 Jan-20 Sep-20 May-21 Jan-22 Sep-22
-0.5 -5 Note: "excess savings" are the cumulative sum of savings above the 2018-19 average and the stock
4Q20 2Q21 4Q21 2Q22 4Q22 2Q23 4Q23 2Q24 4Q24 is indicated by the (red-colored) area under the curve.
Source: BEA, UniCredit Research

Inflation is easing We expect headline CPI inflation to average 4.6% next year and 2.1% in 2024, with core
inflation at 4.8% and 2.7%, respectively (Chart 4). Headline CPI inflation has steadily fallen
from 9.0% in June to 7.7% in October. While monthly core inflation was stubbornly high
through September, it halved to 0.3% mom in October. There are signs that moderation will
persist. Prices for core goods are now falling, led by used cars and apparel. We expect to see
deflation in prices for core goods next year, driven by weaker demand (particularly for
durables), some further improvement in supply-chain constraints, and pass-through of USD
appreciation. Core services inflation will likely take longer to ease, due to the tight labor
market and the way official CPI rents are computed (as a six-month moving average). Private
surveys report that new rents are now falling in level terms, which should mean that official
CPI rent inflation will begin to ease early next year. We expect monthly core inflation to
decline to a 0.2% pace in roughly one year’s time.
We expect the Fed to raise The Fed has tightened monetary policy aggressively, raising the target range for the federal
rates to 5% by end 1Q23 and to
cut rates in 2024 funds rate by 375bp in just nine months. There is likely more to come. We expect the Fed,
after raising rates by 75bp in November, to slow the pace of its rate rises to 50bp at its
December meeting, followed by 25bp hikes at each of its next two meetings, on 1 February
and 22 March. The Fed will likely keep hiking rates until monthly core inflation has shown
clear evidence of moving down towards levels consistent with the Fed’s 2% target. The
October CPI print was the first real sign that domestically-generated inflationary pressures are
easing, but for the Fed to actively consider stopping raising rates, it will likely require a
continued run of lower readings. There will be five more CPI reports by the time of the Fed’s
May meeting. Based on our forecast that monthly core inflation will decline to levels consistent
with the Fed’s 2% target in 4Q23, we expect the Fed to start cutting interest rates in 1Q24.
We forecast 150bp of policy rate cuts in 2024.
Midterms results In the midterm elections, the Democrats performed better than expected, clinching the 50
seats needed to retain control of the Senate (a Georgia run-off election on 6 December will
determine whether Democrats have 51 seats, or the chamber remains split 50-50 with Vice
President Kamala Harris breaking tie votes). The Republicans have gained a slim majority in
the House of Representatives. A Republican-led House is likely to severely disrupt President
Joe Biden’s agenda and it seems unlikely that any major legislation will be passed in the next
two years. Republican leaders have said they want to use the so-called “debt ceiling”, which is
due to be reached sometime early next year, as leverage to push through their own policies,
including cuts to federal spending, but we assume a compromise will be found. Former
President Donald Trump formally announced his intention to run for president again in 2024,
but his leadership bid might be challenged by other Republicans given the worse-than-
expected performance of Trump-supporting candidates in the midterm elections.
CHART 3: A VERY TIGHT LABOR MARKET CHART 4: INFLATION SHOULD EASE NEXT YEAR
Ratio of job openings to unemployed Quits, % of total employment (rs) Headline CPI (yoy %) Core CPI (yoy %)
2.5 3.5 12.0
Forecast
10.0
2 3.0
8.0
1.5 2.5
6.0
1 2.0 4.0
2.0
0.5 1.5
0.0
0 1.0
Sep-08 Sep-10 Sep-12 Sep-14 Sep-16 Sep-18 Sep-20 Sep-22 -2.0
Dec-16 Apr-18 Aug-19 Dec-20 Apr-22 Aug-23 Dec-24
Source: BLS, UniCredit Research

Eurozone
Economic slack to support disinflation path
Marco Valli, ■ We forecast a technical recession at the turn of the year, with GDP seen stagnating in
Global Head of Research,
Chief European Economist 2023 as a whole. The recovery is likely to remain below potential in 2024 (1.0%).
(UniCredit Bank, Milan)
+39 02 8862-0537 ■ We expect price pressure to ease substantially. Headline inflation is likely to decline from
marco.valli@unicredit.eu above 10% currently to around 2.5% at the end of 2023 and to 2% by mid-2024.
■ The ECB’s deposit rate will probably peak at 2.75% in 1Q23. A gradual reduction of the
APP portfolio is likely to follow shortly afterwards at a pace of about EUR 15bn per month.
We expect rate cuts to start in 2H24.
We expect a technical After expanding by more than 3% this year, GDP is likely to stagnate in 2023. A steep drop in
recession in 4Q22-1Q23…
survey indicators confirms that a technical recession at the turn of the year is likely. The main
drivers of the downturn are a severe squeeze in household real incomes, high energy costs
for firms and slower global growth, while the bulk of the effect of tighter ECB policy is yet to be
felt. In the manufacturing sector, a rapid deterioration in new orders and increasing inventory
levels point to a sizeable contraction in output, with little prospects of an imminent turnaround.
Meanwhile, services activity has entered a weakening trend as the boost from the post-
pandemic reopening of the economy fades. Overall, we forecast a cumulative GDP decline of
0.7% over 4Q22-1Q23.
…but not a collapse However, the following important mitigating factors will reduce the likelihood of a more severe
slump: 1. fiscal policy is expected to remain supportive (also through NGEU), although energy-
relief measures will become more targeted as room for maneuver diminishes; 2. bottlenecks are
easing and will probably continue to decrease as demand contracts; 3. private-sector balance
sheets are in a good shape, which reduces the risk of deleveraging – households can still count
on a large savings buffer, while the liquidity position of firms remains very favorable; 4. nominal
wages are accelerating, and 5. firms’ hiring intentions have held up well in the early stages of
the downturn, as labor shortages discourage employers from laying off staff when activity
weakens. This is likely to mitigate and delay the impact of the recession on employment.
Pace of recovery set to be slow We expect a recovery in GDP to start in the spring as disinflation takes hold. However, the
pace of expansion is likely to remain below potential into 2024 due to the lagged impact of
tighter financial conditions (especially on housing investment), fading labor market resilience
and a still weak global recovery. In 2024 as a whole, eurozone GDP will probably rise by only
1%. Two consecutive years of below-trend growth will help re-align aggregate demand and
supply after the major shocks caused by COVID-19 and the conflict in Ukraine.
CHART 1: MANUFACTURING ACTIVITY UNDER PRESSURE… CHART 2: …WHILE HIRING INTENTIONS REMAIN RESILIENT
Manufacturing PMI Manufacturing PMI

70 2.00
65 1.5 Employment-to-new orders ratio - (rs) Employment New orders
65
COVID-19 1.80
60 1.3 60
55 55 1.60
1.1
50
50 1.40
Lehman crisis
0.9 45
45 1.20
40
0.7
40 35 1.00
Headline 30
35 0.5
0.80
New orders/stocks ratio 25
30 0.3
20 0.60
Jan-99 Nov-03 Sep-08 Jul-13 May-18 Oct-22
Jan-99 Oct-03 Jul-08 Apr-13 Jan-18 Oct-22
Source: S&P Global, UniCredit Research

Meaningful disinflation seems We expect inflation to remain above 10% yoy until year-end, before entering a downward path
likely in 2023
that would take it towards 2.5% by the end of 2023 and to 2% by mid-2024. In annual terms,
after reaching 8.6% in 2022, inflation is likely to slow to 5.9% in 2023 and to 2.1% in 2024.
Base effects, broad stabilization in commodity prices, demand compression and a further
easing of bottlenecks are likely to be the main drivers of the deceleration. The ECB estimates
that about half of the core inflation rate is attributable to supply-side factors. As these factors
gradually fade and demand sags, core prices are likely to adjust downwards as well.
Core inflation to ease too Initial signs of an easing of pipeline pressure have started to emerge, although from very high
levels and mainly in the industrial sector, which is directly exposed to weakening demand for
manufactured products and falling prices of industrial metals. Accelerating wage growth is
likely to keep services inflation sticky, at least in the near term. At its current level of 5% yoy,
core inflation is probably at or close to peaking. We expect it to ease substantially over the
course of the forecast horizon, reaching 2¾% at the end of next year and approaching 2% by
the end of 2024. Food inflation has not peaked yet, but leading indicators support
expectations of a meaningful deceleration starting in 2023.
Deposit rate to peak at 2.75% The ECB appears willing to accept, and cause, economic pain to bring inflation back under
control as soon as possible. In our view, two main conditions will have to be fulfilled before the
central bank can halt its rate increases: 1. evidence that core inflation has peaked; and 2. the
unemployment rate starting to rise. We expect that both conditions will be met sometime over
the course of 1Q23. Given the ECB’s determination to fight inflation head-on despite the likely
recession, we now see the peak level for the deposit rate at 2.75%, with 50bp hikes in
December and February and a final 25bp move in March. This would push policy rates more
clearly into restrictive territory and bring the rate increase for this cycle to 325bp.
From rate hikes to QT ECB models suggest that this tightening would reduce activity by about 3% through 2024, on
top of which one has to consider the effect of balance-sheet reduction. By creating the
conditions for accelerated TLTRO repayments, the ECB wants to bring forward the time when
its balance sheet starts contributing to the normalization of monetary policy. Quantitative
tightening (QT) would be the next step. In December, the ECB will outline the “principles” of
QT – with implementation likely to start in 2Q23 once rate hikes are over. We expect that QT
will initially involve the reduction of APP holdings, while PEPP bonds continue to be
reinvested in full, thus maintaining the first line of defense against fragmentation. Similar to
the Fed, the ECB might opt to cap the amount of redeemed bonds that are not reinvested.
Initially, this cap might be set at about EUR 15bn per month.
We expect 75bp of rate cuts in The return of inflation to 2% will allow the ECB to start cutting rates in mid-2024. We expect
2H24
three 25bp cuts in 2H24, bringing the deposit rate to 2%, the upper end of a neutral range.
CHART 3: INFLATION TO DECELERATE STRONGLY IN 2023 CHART 4: ECB HIKES ARE BEING PASSED ON
12.0 Change in bank lending rates since end-2021 (composite rate, new business, pp)
Forecast 2.00
Headline HICP (yoy %)
10.0
Core HICP (yoy %)
8.0 1.50
6.0
1.00
4.0
2.0 0.50
0.0
0.00
-2.0 NFCs Mortgages NFCs Mortgages NFCs Mortgages NFCs Mortgages NFCs Mortgages
Dec-16 Apr-18 Aug-19 Dec-20 Apr-22 Aug-23 Dec-24 Eurozone Germany France Italy Spain
Source: Eurostat, ECB, UniCredit Research

Germany
Dr. Andreas Rees, After a rise of probably 1.7% in 2022, we expect real GDP to shrink 0.2% in 2023 and to grow
Chief German Economist
(UniCredit Bank, Frankfurt) again 1.3% in 2024 (each on a non-working-day adjusted basis). In our baseline scenario, we have
+49 69 2717-2074 assumed that there will be no shortages in natural gas. Given the substantial uncertainties in key
andreas.rees@unicredit.de
macro and geopolitical drivers, the forecast risks point to the downside, especially for 2023.
Technical recession While GDP still surprised on the upside in 3Q22 (+0.3% qoq), we expect the German
economy to enter a technical recession at the turn of the year (4Q22: -0.4%; 1Q23: -0.3%)
before growing again from spring 2023 onwards (+0.2-0.3% qoq in 2023). Higher energy
costs are likely to weigh on private consumer and capex spending and might cause a further
scaling back of production in energy-intensive sectors. These negative effects will probably be
amplified by shrinking global trade at the turn of the year hampering activity in the export-
dependent manufacturing industry.
“Airbags” dampening impact of However, we think that some “airbags” will cushion the blow to the German economy and
higher energy prices
therefore prevent a deeper recession. In particular, backlog orders in the manufacturing sector
hit a record high of more than 4½ months in terms of production in 4Q22 (Chart 1). Construction
companies will also be able to work off substantial backlog orders, although the high rate of
cancellations, especially in the housing sector, argues for a less effective buffer. The upcoming
price caps on electricity (in January 2023) and natural gas (March 2023) for households and
SMEs will probably also provide some relief for economic activity. Industrial companies will
already benefit from these price caps from January 2023 onwards.
Disinflation in 2023 and 2024 We expect consumer price inflation to peak at more than 11% yoy at the turn of the year, as
energy suppliers are likely to further pass on higher prices to households, especially for natural
gas. Price caps on energy kicking in in 2023 together with base effects, the normalization in
commodity prices and the easing of supply bottlenecks, are likely to lead to a deceleration in
inflation rates to about 4% in 4Q23 and to 2½% in 4Q24. On an annual basis, consumer prices
are still expected to increase by a high 7.0% in 2023 and 2.9% in 2024 (2022: 8.2%).
Significantly higher wages We expect tariff wages (including special payments) to accelerate markedly to about 5% in
2023 from roughly 3% in 2022, thereby closing the gap to the rise in effective wages
(Chart 2). At the time of writing, negotiations in the metal and electrical industry, which covers
key sectors such as auto and machinery, have continued with a wage demand of 8% on a
12-month basis. In the public sector, where the collective bargaining round is likely to start at
the beginning of 2023, the labor unions have demanded a wage hike of 10.5%. In the
chemical sector, a wage increase of nearly 8% on a 12-month basis has already been agreed
upon, consisting of both one-off payments and regular wage hikes in 2023 and 2024.
CHART 1: VERY HIGH BACKLOG ORDERS CHART 2: WAGE GROWTH LIKELY TO ACCELERATE
Backlog orders, in months Wage growth, in % yoy; *1H22

5.0 11.0
Tariff wages Effective wages
Manufacturing Construction 10.0
4.5 9.0
8.0
4.0
7.0
3.5 6.0
5.0
3.0 4.0
3.0
2.5 2.0
1.0
2.0
0.0
1.5 -1.0
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022*
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
Source: Ifo, Bundesbank, UniCredit Research

Fiscal policy outlook: expansionary stance to continue

Expansionary stance continues Although higher public spending related to COVID-19 has increasingly been phased out, we
expect the fiscal policy stance to remain expansionary in 2023 and 2024. Above all,
substantial relief packages for households and companies designed to dampen the negative
impact of higher natural gas and electricity prices will become effective. Furthermore, military
spending will be ramped up substantially, especially from 2024 onwards. Finally, additional
public spending for fighting climate change and transforming the economy has been
scheduled by policymakers for the next few years. Importantly, the expansionary stance of
fiscal policy is likely to support economic activity, although not all the goods purchased by the
government, such as those for military purposes, will be produced in Germany.
Rising shadow budgets Most of these additional expenditures will not come through the regular budget but through
shadow budgets whose funds and/or borrowing authorizations have been granted in 2021 and
2022 while the debt brake was still suspended. The shadow budget with the highest funds is
the Economic Stabilization Fund (ESF) which amounts to EUR 200bn, or more than 5% of
GDP. This fund is largely being used to finance price caps on natural gas and electricity for
households, SMEs and larger industrial companies. Furthermore, energy suppliers will be
supported to ensure a proper functioning of energy markets. The EUR 200bn may only be
used to combat the energy crisis and not for other purposes. An additional EUR 100bn, or
about 2½% of GDP, has been made available by policymakers through a special military fund
to finance defense spending over the next five years on top of the regular defense budget.
This military fund has explicitly been exempted from the provisions of the debt brake by
enshrining it in the constitution. Finally, the government announced a substantial spending
increase of nearly EUR 180bn, or about 4½% of GDP, from 2023 to 2026 through the climate
and transformation fund (CTF). The CTF is financed through revenue from the selling of
emissions allowances and grants from the regular federal budget.
Fiscal deficits are likely to The extensive use of these shadow budgets is likely to paint a rather fragmentary picture of
remain high …
expenditure and funding activity that is reported in the federal budget. However, the fiscal deficit
and debt figures, which are released on basis of the Maastricht criteria, will still correctly reflect
higher public spending. The reason for this divergence is that the Maastricht criteria requires
public spending to be recorded in the time period in which it occurs (accrual principle),
irrespective of whether the funds stem from the regular budget or shadow budgets. As a result,
the “true” fiscal deficits according to the Maastricht criteria are likely to remain comparatively
high in 2023 and 2024. At the same time, and paradoxically, German policymakers may still be
able to claim compliance with the debt brake on the basis of the federal budget1.
… although the precise figures Accordingly, we forecast a fiscal deficit (in line with the Maastricht definition) of about 3% of
are highly uncertain
GDP in 2023 and 2% in 2024 after about 2½% in 2022. The expected decline in the 2024
headline deficit figure is likely to be caused by higher tax revenues in light of the moderate
recovery. However, uncertainty is unusually high for the following two reasons. First, since it is
not clear how natural gas and electricity prices will develop, it therefore remains to be seen
how much money is actually needed to finance the price caps for households and companies
under the ESF. Second, and on a positive note, tax revenues could be higher than anticipated
given the robust labor market and even stronger-than-expected wage hikes. Furthermore, still
comparatively high inflation in 1H23 may lead to further strong rises in VAT revenues.
Implications for European Given higher fiscal deficits and long-term challenges ahead, such as fighting climate change
fiscal policy
and geopolitical tensions, we expect the German government to be at least somewhat flexible
when it comes to reforming the European Stability and Growth Pact in 2023.
1 At the beginning of 2022, the traffic light coalition tweaked the regulations of the debt brake with regard to the accounting of special funds. Accordingly, the time
that the special funds were provided from public money or borrowing authorities (when the debt brake was still suspended in 2022) is now decisive, rather than the
time the funds are spent afterwards, which was the case before.

France
Tullia Bucco, We expect French GDP to rise by 2.5% in 2022, 0.2% in 2023 and 1.1% in 2024. The country is
Economist
(UniCredit Bank, Milan) likely to have entered a recession in 4Q22 amid easing momentum in services activity and
+39 02 8862-0532 manufacturing slipping into negative territory. However, the recession is likely to be mild and
tullia.bucco@unicredit.eu
short-lived, lasting only through the winter. This reflects the reasonably healthy financial position
of French households and businesses and further government support (about 2% of GDP in
Technical recession in 4Q22- 2023) to mitigate the negative impact of persistently high energy prices. The subsequent
1Q23 to be followed by shallow recovery will probably be shallow due to a combination of high uncertainty, tight financing
recovery
conditions and fading labor market resilience. GDP growth is likely to regain momentum in 2024,
although sequential growth might not return to trend growth before the end of the year.
The slowdown in 2023 GDP growth is likely to be driven by a significant easing in both
Significant easing in both
private consumption and gross private consumption and gross fixed investment growth. Households are likely to use the
fixed investment growth savings accumulated during the COVID-19 crisis (currently estimated at 6.7% of GDP) to
offset a contraction in real disposable income driven by high inflationary pressure and a
slowdown in labor income growth. However, cost-of-living concerns and a deteriorating labor
market will probably induce households to use their savings sparingly to finance spending.
Therefore, we expect private consumption to grow only marginally next year. On the
investment side, non-financial corporations are likely to postpone some of their investment
plans amid increased uncertainty and deteriorating profitability due to the general increase in
production costs and tighter financing conditions. Household investment will probably start to
shrink as the rise in interest rates dampens demand.
Consumer inflation is likely to slow down from 5.3% in 2022 to 4.4% in 2023 and 2.0% in
Inflation will start to decelerate
2024. The deceleration in 2023 is likely to be driven by large base effects in food and
transport prices and, to a lesser extent, manufactured goods prices. Services inflation is
likely to prove stickier due to second-round effects. Electricity and gas inflation will continue
to be mitigated by government measures aimed at limiting price increases, although the
subsidized discount on fuel will be unwound in January.
The government forecasts a budget deficit of 5.0% of GDP for 2023, broadly unchanged
We see the risk of a slippage in
the fiscal deficit target compared to 2022. The deficit stabilization is mainly driven by the phasing out of most
pandemic-related measures and lower investment under the country’s recovery plan
(including the nationally financed “France 2030” plan) compared to 2022, which will be offset
by spending on measures to address the energy crisis. We think this forecast suffers from
upside risks as it is based on what we see as an overly optimistic 2023 GDP forecast
(1.0%), which is likely to result in lower revenue and higher expenditure than the target. We
forecast a deficit/GDP ratio of 5.3% and a debt/GDP ratio edging up to 112.1% in 2023.
CHART 1: CONSUMER CONFIDENCE DETERIORATED SHARPLY CHART 2: SUBSTANTIAL SPENDING ON RELIEF MEASURES
(standardized values) 9 300

2 -3 Government earmarked funding (Sep 2021-
8 Oct 2022) to shield households and
-2 businesses from the energy crisis (% GDP) 250
1 7
-1 Allocated funding (EUR bn, RS)
6 200
0 0
5
Peak of the 1 150
-1 yellow vest 4
crisis 2
3 100
-2 3
Second lockdown 2
Opportunity to make major
4
purchases 50
-3
Opportunity to make savings First lockdown 5 1
(inv. scale, rs)
-4 6 0 0
LT
EL
PT
LU
LV
ES
IT
BG
AT
PL
SK
SI
BE
EE
SE
IE
MT
DE
NL
HR
UK
CZ
FR
RO
DK
NO
CY
FI
Dec-07 May-10 Oct-12 Mar-15 Aug-17 Jan-20 Oct-22

Jun-22
Source: Bruegel, INSEE, UniCredit Research

Loss of parliamentary majority risks undermining Macron’s

chances of passing major economic reforms
Since June’s legislative elections, when his coalition party lost its absolute majority in the
Passing major economic National Assembly, French President Emmanuel Macron has succeeded in pushing some key
reforms will be challenging for bills through either by relying on the support of the center-right Les Republicans (LR) or, in the
the government next year
absence of this, by using emergency powers under article 49.3 of the constitution, as was
recently the case with the first reading of the 2023 budget. However, passing his flagship
reforms, such as raising the state retirement age, is likely to prove challenging next year. Mr.
Macron warned that if he lacked the parliamentary support to implement his reform agenda,
he would dissolve parliament and call early elections in the hope of securing a majority rather
than abandoning his ambition to carry out his electoral program. We think this is a distinct
Macron threatened to dissolve possibility next year, although the government will try as much as possible to avoid this
the parliament to end a eventuality until its chances of widening its majority increase.
deadlock
The government might not be able to rely on article 49.3 of the constitution to overcome stiff
Emergency powers can be
opposition to its agenda next year. This procedure can only be used once for ordinary
used once during a legislation during a parliamentary session – the current one is running until June – and the
parliamentary session for non- government may be obliged to use it to enforce the adoption of the public finance
financial legislation
programming law for the years 2023 to 2027, if it cannot assemble a supporting majority, as is
currently the case. The approval of this text, which is an ordinary law despite being budgetary
in nature, was set as a condition for the disbursement of the outstanding tranche of NGEU
funds (equal to EUR 13bn) by the European Commission. Therefore, any attempt to evade
this obligation would send a negative signal to its peers about the government's commitment
to abiding by European rules.
The approval of some key economic reforms is thus likely to depend on the hard-to-predict
The conservative party is just
too weak and fractured to voting behavior of the conservative party. Shortly after voting in favor of a government
maintain a common stance on package of fiscal emergency measures in July, LR announced that it would no longer support
whether or not it wants to
support Macron the government for fear that this could undermine its prospects for standing a chance of
winning the 2027 presidential election. Since then, the party has broadly stuck to this stance
in the National Assembly, while in the Senate, where LR holds the majority of seats, it has
recently supported two bills after introducing several amendments. An increasing number of
members of parliament appear to be keen to accept the recent offer by Mr. Macron to form a
coalition, at least on a case-by-case basis, with the aim of counteracting the now-dominant
opposition forces of the hard-left and the hard-right. If anything, ideologically, the LR party is
broadly in favor of many of Mr. Macron’s proposals: a lengthening of the retirement age, for
example, was also at the center of the LR electoral agenda. Importantly, LR members
acknowledge that their party would not gain from the government losing confidence and early
elections being called – recent opinion polls indicate that probably only the far-right populist
National Rally party would do so. There is also a widespread sentiment of disillusion about the
possibility that the forthcoming election of a new leader at a party conference scheduled for
December would help bring together the different personalities that are currently vying for
position. It is likely that the willingness of the LR party to support Mr. Macron’s legislative
agenda will ultimately depend on the government’s ability to strike compromises on a case-
by-case basis with the different LR party factions.
Social discontent also risks Social discontent is another factor that risks upsetting Mr. Macron's plans, not only to
hindering Macron’s plans
implement his reform agenda but also in terms of his resolution to call early elections in the
event of a lack of support. High energy prices are squeezing household real disposable
income, which is fueling resentment against the government despite its substantial efforts to
mitigate the impact of the energy crisis on the population. If social discontent were to escalate
into anger due to a harsh winter or the perception by some social groups that they are being
left behind, Mr. Macron would refrain from taking any action that could risk bringing the battle
on reforms to the street or seeing him defeated at the polls.

Italy
Dr. Loredana Maria Federico, We expect to see a 0.1% GDP contraction in 2023 and GDP growth of 0.9% in 2024. At the end
Chief Italian Economist
(UniCredit Bank, Milan) of our forecast horizon, GDP is projected to be 2.5% higher than it was in 4Q19 and not far from
+39 02 8862-0534 hitting its modest pre-pandemic growth trend. As Italy needs to expand its infrastructure and
loredanamaria.federico@unicredit.eu
increase its reliance on liquefied natural gas to complete the process of diversifying its gas
supply from Russia by 2025, it remains exposed to risks related to rebuilding gas storage.
Italy’s GDP will probably grow by 3.7% in 2022, providing a small carryover into next year. We
From strong to broadly flat project that economic activity will shrink in 4Q22-1Q23 as a recession in industry is expected to
GDP growth
intensify and growth in services output slows – after the significant improvement shown recently.
Economic growth is projected to pick up from 2Q23, also boosted by spending related to the
Recovery and Resilience Plan (RRP).
Italy is particularly vulnerable to the main headwinds envisaged in our outlook: 1. global
demand growth is expected to move close to zero next year, from above 5%, on average, in
The main headwinds at play 2021. This, together with a projected-stronger EUR-TWI, should dampen export and
investment recovery. 2. Households’ real disposable income already contracted in 2Q22.
From there, consumer-price inflation accelerated further and is likely to remain high in 1H23,
while employment growth is forecast to slow. Fiscal support and a still-large savings buffer are
projected to cushion deterioration in consumer spending. 3. The increase in the private
sector’s borrowing costs is likely to reflect both the change in the ECB’s monetary-policy
stance and the related increase in credit spreads, with the main mitigating factor being Italian
banks’ high reliance on (cheap) retail deposit funding. The negative impulse from this will be
felt in 2023 and 2024, via dampening domestic demand.
Inflation hit 11.8% in October, one of the highest readings among the largest euro-area
A case of cost-push inflation, countries. Increasing energy prices contributed 60% to this, mostly due to high gas and
especially for Italy electricity tariffs, and food-price inflation contributed 20%. When energy and food prices are
excluded, inflation was 4.2%. Based on the assumption that gas and food prices will not record
new spikes, we expect a deceleration in energy-price inflation to drive down inflation quickly, to
close to 2.5% by end-2023. We project that contractual wage growth will accelerate compared to
2022 but that it will remain relatively moderate within the eurozone.
Italy has been receiving large support from NextGenerationEU (NGEU). The European
Commission (EC) has already disbursed to Italy funds worth 3.8% of GDP, which could be
NGEU: Italy has a buffer to
cushion its growth slowdown promptly used to finance a larger increase in public spending next year, compared to 2022. We
expect the government to achieve, by year-end, most of the investment and reforms envisaged
for 2H22, clearing the way for the disbursement of a third payment worth 1.0% of GDP in 2Q23.
CHART 1: HOUSEHOLD REAL INCOME HAS BEEN AFFECTED CHART 2: ITALY AS A MAIN BENEFICIARY OF NGEU
Households (annual changes,%) Euro area: Recovery and Resilience funds (% GDP)
8 Greece
Real disposable income Italy
6 Portugal
Nominal disposable income Slovakia
Spain
4
Latvia
Cyprus
2 Lithuania
Slovenia
0 Estonia
Malta
France
-2 Belgium
Austria
-4 Finland
Germany
Luxembourg EU funds requested
-6
Netherlands
Ireland EU funds disbursed
-8
2Q11 2Q12 2Q13 2Q14 2Q15 2Q16 2Q17 2Q18 2Q19 2Q20 2Q21 2Q22 0 2 4 6 8 10 12 14 16 18
Source: EC, Istat, UniCredit Research

Italy’s next economic challenges require prudence

The need to cushion the effects Next year, the government’s fiscal challenge will be twofold: 1. to manage Europe’s energy
of the energy crisis will remain
crisis by shielding its impact on households’ and firms’ income and 2. to continue to
a fiscal challenge…
implement its economic agenda, ranging from lowering the tax burden (also via the
implementation of a flat tax) to increasing public spending (to support firms’ competitiveness
and pensions).2 Regarding the former, our baseline scenario is consistent with the
government’s decision to increase the budget deficit for next year by about 1.1pp, to 4.5% of
GDP, to mainly extend to 1Q23 measures to tackle high energy bills. We project a gradual
exit from some of them, including discounts on motor-fuel prices.
The government has stated several times that it will comply with EU fiscal commitments. This
means that it will be called upon to continue to target a primary balance that is at least close
to zero by 2024 (from a primary deficit of 1.5% of GDP this year). This is reflected in our base
…curbing the government’s case, although, as the government has been in power for just a few months, we have factored
ability to implement its in a degree of uncertainty and will pay particular attention to its future decisions. As a
economic agenda
consequence, we expect a gradual approach to be applied to the implementation of the
economic agenda. This would also imply 1. limiting current primary public spending – and
allowing temporary rather than structural measures (like those on pensions) to be targeted,
and 2. placing any tax-reduction efforts within a more-general reform aimed at improving the
efficiency of the tax system, for instance, by streamlining tax expenditures.
Higher funding needs next year Moreover, a budget deficit of 4.5% of GDP in 2023 already implies that overall funding needs
and increasing borrowing of about EUR 100bn will be targeted next year (from about EUR 70bn worth in 2022) at a time
costs will reduce available
fiscal space further when the ECB will no longer be a net purchaser, providing only indirect support to the market
mainly via flexible PEPP reinvestments and the TPI. So, fiscal prudence will be needed for
Italy to attract investors. EU loans will provide a helping hand; EUR 9bn should be made
available early next year, while the release of another EUR 15bn will depend on the
government’s achieving all reforms and investment for 1H23. Lastly, as a result of high
inflation and high yields at issuance, the budget situation has been made more difficult
because interest expenditure relative to GDP is likely to exceed the levels prevailing until
2021. Interest expenditure is forecast at around 4.0% of GDP in 2023-24 (from 3.6% in 2021).
This will complicate the country’s achievement of a budget deficit below the 3% of GDP
reference value in 2024, when EU fiscal rules are likely to be restored. Any further increase in
interest costs from this level is likely require further commitments.
We do not see any incentive for Completing the RRP will be one of the other key tasks of the government. Its implementation
the government to put at risk will continue to be closely scrutinized, as it is crucial to improving Italy’s growth in the medium
the execution of the RRP
term. The government will be called upon to create the conditions for reforms to progress,
including the entry into force of key structural reforms (such as those affecting the country’s
justice system) and boosting EU-financed public investment. We expect the government to
work with the EC to introduce changes to the current plan, especially with regard to energy
security spending and to take into account higher input prices. Dialogue with the EC is likely
to intensify in the near future, and, in theory, it might lead to some delays in the execution of
the RRP. Our view is that the government will try to minimize the reputational damage likely to
arise from slowing a process that has worked very well so far and, above all, from foregoing
an opportunity for the country to benefit from the remaining funds that are to be made
available to Italy through NGEU. These will slightly exceed EUR 100bn (more than 5% of
GDP) by 2026. More in general, we continue to believe that it is in the country’s best interest
to proceed along a path of cooperation with the EC and the EU.
2 See our Economics Flash - Italy: narrow path for the new government’s policy agenda, 3 October 2022.

Spain
Edoardo Campanella, After an expansion of around 4.5% in 2022, we expect GDP growth to decelerate to 0.9% in
Economist
(UniCredit Bank, Milan) 2023, before reaccelerating to 1.4% in 2024. Although Spain is one of the eurozone
+39 02 8862-0522 economies least exposed to Russian natural gas, the drop in consumer and business
edoardo.campanella@unicredit.eu
confidence due to the conflict in Ukraine, the erosion of household purchasing power and a
tighter monetary policy stance have already taken their toll on economic growth, which
sharply decelerated in 3Q22 to 0.2% qoq from 1.5%. We expect growth in 4Q22 and 1Q23 to
roughly stagnate, while gradually regaining momentum in the following quarters thanks to
easing energy prices, a further normalization in tourist flows, a resilient labor market and the
implementation of the Recovery and Resilience Plan. In 2024, economic activity should
further strengthen thanks to an overall improvement in the global outlook.
A vigorous labor market so far The labor market has recovered nicely thanks, in part, to recent reforms (approved in 2021)
aimed at increasing the number of open-ended contracts through the reduction in the types of
temporary contracts and tighter restrictions in their use. The number of social security
affiliations has never been as high as in 2022 and the unemployment rate is likely to stabilize
at around 12% throughout our forecasting horizon – still high, but a level last hit in 2008.
On the price front, headline inflation peaked at 10.8% yoy in June and has since started to
Inflation to remain above target
in 2024 gradually decline. We expect headline inflation to average 4.1% in 2023 and 2.5% in 2024.
Next year in particular, moderation in energy prices and weakening aggregate demand, along
with government measures such as the VAT reduction on gas and the cap on wholesale gas
prices, will contribute to ease inflationary pressure.
The Spanish government has adopted a variety of measures to contain the negative impact of
Government budget deficit to high energy prices, besides those mentioned above, these include a 20-cent-per-litre fuel
improve
rebate, a social heating voucher and several subsidies for low-income households. However,
overall tax revenues are seen resilient thanks, among other things, to the boost to digital
payments triggered by the pandemic that will partly offset higher spending. Overall,
government budget deficit is expected to come in at 4.3% in 2023 from 4.6% this year.
Next year, Spain will elect a new parliament. According to the most recent polls, the People
The right is on the rise Party (PP) is the most popular party with support above 30%, almost 5pp ahead of the
Socialist Party. The far-right party, Vox, is the third most popular party, with an approval rating
of around 15%, followed by Unidos Podemos. Ciudadanos, on the other hand, is going
through a protracted existential crisis and polls suggest it would struggle to obtain 2% of the
vote. Although for many years the political agendas of the PP and Vox looked unreconcilable,
the two parties have recently managed to reduce their ideological distance, striking alliances
in some regions, such as in Castilla y León, where they govern together.
CHART 1: POST-PANDEMIC NORMALIZATION NOT OVER YET CHART 2: VIGOROUS RECOVERY IN THE LABOR MARKET
Valued added (difference with 4Q19, pp) Social Security affiliations (mln)
21.0
3Q22 2Q22 1Q22
2018 2019 2020 2021 2022
I&C
20.0
Transport & accomodation
Professional activities
19.0
Recreational activities
Financials
18.0
Real estate
Industry
Public administration 17.0
Construction
-20 -10 0 10 20
Source: INE, UniCredit Research

Austria
Stefan Bruckbauer, A very strong first half of the year probably led to economic growth of almost 5% in 2022. For
Head and Chief Economist Austria
(Bank Austria) 2023, we expect to see GDP growth of 0.3%. For 2024, we forecast only a moderate pace of
+43 505 05 41951 recovery, allowing for restrained economic growth of 1.2%.
stefan.bruckbauer@
unicreditgroup.at The significant downturn that began in the fall is even likely to cause a recession over the winter
Walter Pudschedl,
of 2022. However, we expect it to be short and mild, as private consumption is unlikely to slump
Economist sharply despite a loss of purchasing power due to high inflation. Fiscal measures and a fairly
(Bank Austria) stable labor market should counteract this. A high order backlog should prevent an overly severe
+43 505 05 41957
walter.pudschedl@ slowdown in construction activity, while export-oriented industry, hit by a negative terms-of-trade
unicreditgroup.at shock, will record significant losses in output and noticeably scale back its investment activity.
Subdued recovery following a
After an expected-weak start to 2023, a recovery should begin, but its pace is likely to be
winter recession moderate in light of what should be a slow easing of the burden from high energy prices.
Good economic development in the first half of the year caused the unemployment rate to fall
Limited negative impact on the well below pre-pandemic levels, and a shortage of labor has increased significantly. Having
labor market
exceeded 120,000, job vacancies in Austria are at a record level. After Austria’s unemployment
rate averaged 6.4% in 2022, we expect it to stabilize at this level in 2023 as companies seek to
retain their skilled workforce despite economic challenges.
Inflation in Austria is expected to peak around 11% yoy at the turn of the year. Due to
Inflation is expected to exceed noticeable second-round effects, inflation is expected to come down more slowly than originally
the euro-area average expected. After recording an annual average of 8.5% in 2022, we expect inflation to amount to
6.5% in 2023 and to 3% in 2024.
Doing away with COVID-19 support measures eased the overall burden on the 2022 budget,
but this was offset by a host of new measures, including three anti-inflation packages. While
Slower budget consolidation
and debt reduction some measures intended to compensate for inflation will be discontinued in 2023 (in particular,
one-off payments), spending will rise sharply as a result of an agreed electricity-price brake for
households and companies, the valorization of social benefits and a sizeable increase in
pensions. At the same time, the removal of the so-called cold progression will curb tax
revenues. After reaching 5.9% in 2021, the general government balance is nevertheless
expected to improve to 3.3% of GDP in 2022 and further to 3.0% in 2023, weighed down by
interest on public debt, which will rise from under EUR 4bn in 2022 to around EUR 9bn in 2023.
Total public debt, which is expected to have fallen back below 80% of GDP in 2022, will
therefore improve only slightly over the forecast period, to around 75% of GDP by the end of
2024.
CHART 1: AGAIN, DEVIATION FROM PRE-PANDEMIC TREND CHART 2: ENERGY PRICES TO LOWER INFLATION IN 2023
Real GDP 4Q19=100 Transport Housing, energy Food Other effects Total CPI
110 11%
Pre-pandemic trend Actual 10%
9%
105
8%
7%
100 6%
5%
95 4%
3%
2%
90
1%
Forecast
0%
Forecast
85 -1%
4Q19 2Q20 4Q20 2Q21 4Q21 2Q22 4Q22 2Q23 4Q23 2Q24 4Q24 Jan-20 Jul-20 Jan-21 Jul-21 Jan-22 Jul-22 Jan-23 Jul-23 Jan-24 Jul-24
Foreca
Source: Statistik Austria, UniCredit Research

CEE
Weathering geopolitical and economic shocks
Dan Bucsa ■ We expect the economies in EU-CEE3 to grow by around 0.4% in 2023 and 3.1% in 2024,
Chief CEE Economist
(UniCredit Bank, London) slowing from 4.1% in 2022. We assume there will be a technical recession in the coming
+44 207 826-7954 quarters due to falling purchasing power and foreign demand, tighter financial conditions
dan.bucsa@unicredit.eu
and lower fiscal spending. A rebound is likely from 2H23 onwards if the eurozone economy
recovers as well. The Western Balkans might trail the EU-CEE recovery.
■ In Turkey, we expect economic growth at 3.1% in 2023 and 3.6% in 2024, with growth
improving in 2024 only if financial risks are addressed after the 2023 elections. In Russia, the
recession could accelerate to -5% in 2023, followed by a small rebound to around 2.5% in
2024 if import substitution improves, underpinning a gradual recovery in aggregate supply.
■ We expect fiscal transfers, tight labor-market conditions and higher energy and food prices
to keep inflation outside target ranges in 2023-24. As a result, we see rate cuts in EU-CEE
as being limited to 4.5-7% by the end 2024, while in Turkey we expect rates to be hiked to
45% in 2023. In Russia, cuts to 6.5% are possible if inflation returns to target in 2024. We
see all CEE central banks continuing to intervene in FX, with those in Poland, Romania
and Serbia being more successful. The CBR might allow the RUB to depreciate gradually.
■ We assume that the Russia-Ukraine conflict will continue into 2024, without escalating to
the use of non-conventional weapons and/or spilling over to the rest of Europe. Besides a
more damaging conflict, the main risks for CEE in 2023 are the lack of a common
European energy policy; a standoff with the European Commission due to weak adherence
to the rule of law in Hungary, Poland and Romania; limited appetite for reforms ahead of
elections in Bulgaria, Poland, Slovakia and Turkey; a financial crisis in Turkey if monetary
and fiscal policies are not tightened after the elections; nationalist tensions in the Western
Balkans; and Russia’s economic and political isolation.
CEE economies more resilient Nine months after Russia invaded Ukraine, CEE economies are more resilient than had been
than feared...
feared at the start of the conflict. While consumers turned markedly more pessimistic when
the war began, their spending habits changed only gradually due to rising inflation. Expecting
higher prices and interest rates, households frontloaded spending and borrowing in 1H22 and
many exhausted the precautionary savings amassed in 2020-21. The exceptions are
clustered in countries where energy prices rose at a slower pace owing to administrative caps
and/or where wage growth tracked inflation. Despite the slowdown in Europe, orders and
economic activity remained resilient in the autumn, while vacancies fell little from all-time
highs in sectors with high employment, such as electronics and machinery, and the
automotive industry. Companies in construction and services from retail to IT have reported
labor shortages while they expect business to slow over the winter.
…but a technical recession is Although economic activity was resilient in the first three quarters of 2022, we do not expect
likely in 4Q22 and 1Q23 CEE to avoid a technical recession in 4Q22 and 1Q23 if GDP contracts in the eurozone and
global growth slows over the winter. In our view, the main reasons for an impeding slowdown
are high energy costs on the supply side and falling purchasing power and demand from the
eurozone on the demand side, amid tighter financial conditions and lower public investment.
High energy costs are affecting companies in energy-intensive sectors (especially the
manufacturing of metals, chemicals, construction materials, glass and food) and SMEs that
have limited economies of scale. The risk of permanent scarring is very high where restart
costs are significant (for example for non-ferrous metal smelters) or where expected energy
prices are too high to ensure business continuity over the medium term (fertilizer producers).
Imports will have to rise to prevent disruptions along supply chains, with the highest risks
faced by farmers, food processors and transporters.
3EU-CEE refers to CEE countries that are members of the EU: Bulgaria, Croatia, Czechia, Hungary, Poland, Romania, Slovakia and Slovenia.

Sufficient natural gas in most We estimate that Poland, Romania, Bulgaria and Slovakia have secured enough natural gas
countries, except for Hungary
and Serbia for an average winter without importing from Russia. If the weather remains milder than usual,
natural gas could suffice in Croatia and Czechia for the four months ending March 2023. The
CEE countries most vulnerable to a potential halt in natural-gas imports from Russia would be
Hungary and Serbia, with only the former starting to diversify purchases to Western sources.
We assume that Russian gas flows to Turkey will continue.
Even if natural gas and electricity prices fall in Europe, risks will persist in CEE because
energy distributors are running out of liquidity as their margins are squeezed, taxation has
risen and acquisition costs are fluctuating much more than selling prices. Unlike in Western
Europe, public support to the energy sector has been muted.
We expect households to reduce spending as their purchasing power is further hit by rising
prices, especially for energy and food. Consumers are also likely to borrow less than in 9M22
due to higher interest rates and restrictive lending standards. We expect tighter financial
conditions to slow corporate and mortgage lending from 4Q22 onwards. We assume that
housing and capex will remain weak, at least in 1H23. Although households are in a better
financial position than at any point since the global financial crisis, we expect non-performing
loans to rise next year. Infrastructure spending could be crowded out in 2023 as governments
focus on cushioning households and, to a lesser extent, companies from higher energy prices.
A recession in the eurozone would reduce export demand in CEE. So far, there is little
evidence that existing orders are being withdrawn, despite some having been placed back in
2020. If this remains the case, CEE manufacturing could weather the upcoming global
slowdown by working through existing order books as supply-chain bottlenecks continue to
ease. Either way, we expect companies to reduce the massive inventories they built up during
2020-22, with destocking contributing to the economic slowdown throughout CEE.
Companies are likely to postpone investment projects until 2H23, when we expect demand to
A gradual rebound expected
from 2H23 onwards recover across Europe. If the eurozone undergoes a brief and rather shallow recession at the
turn of the year, CEE is well placed for a swift economic rebound, underpinned by tight labor
markets and pent-up demand. Wage growth could outpace inflation in 2023 if companies wish
to maintain current levels of employment. Moreover, it is unlikely that wage bargaining will
shift quickly to low indexation in 2024, further supporting consumer demand.
We expect GDP to grow by 0.4% Thus, we forecast economic growth to slow in EU-CEE from around 4.1% in 2022 to 0.4% in
in 2023 and 3.1% in 2024 in EU- 2023, only to rebound to 3.1% in 2024, returning close to potential (Chart 1 and Chart 2). The
CEE…
Western Balkans are likely to trail their EU neighbors. We expect GDP growth to slow in
Turkey from 5.5% in 2022 to 3.1% in 2023, despite fiscal and monetary easing ahead of next
…and by 3.1% in 2023 and 3.6%
in Turkey… year’s parliamentary and presidential elections. Rising financial risks might lead either to
sharply tighter monetary conditions after the elections or to a balance-of-payments crisis. Only
conventional monetary policy would restore the trust of foreign lenders, allowing economic
growth to return close to potential in 2024, at around 3.6%.
In Russia, incomplete import substitution and military demand crowding out resources for
…and to fall by 5% in 2023 in
Russia, rebounding by 2.5% in other types of manufacturing could deepen the economic contraction in 2023 to around -5%
2024 from -4% in 2022. Following the partial mobilization announced in late September,
consumption dipped once more. The CBR’s business indices suggest that most sectors face
a downturn in activity with the removal of around one million people of working age, of which
more than 200,000 have been mobilized4 and the rest have fled the country5. A moderate
rebound to around 2.5% is possible in 2024 if import substitution improves, underpinning a
slow recovery in aggregate supply, and domestic demand starts to rebound after two years of
contraction.
4 Russia says over 200,000 drafted into army since Putin's decree | Reuters
5 Over 700,000 Russians enter Georgia after mobilisation announcement, 100,000 of them remain in the country (novayagazeta.eu)

CHART 1: SLOW GDP GROWTH EXPECTED IN 2023… CHART 2: …WITH A REBOUND POSSIBLE IN 2024
yoy (%), Private consumption Public consumption Fixed investment yoy (%), Private consumption Public consumption Fixed investment
pp pp
Net exports Inventories, error GDP Net exports Inventories, error GDP
Turkey Turkey
Croatia Croatia
Serbia Serbia
Romania
Romania
Slovenia
Slovenia
Bulgaria
Bulgaria
Slovakia
Slovakia
Poland
Poland
Czechia
Czechia
Hungary
Hungary
Russia
Russia
-6.0 -4.0 -2.0 0.0 2.0 4.0 6.0
-6.0 -4.0 -2.0 0.0 2.0 4.0 6.0
Source: central banks, national statistical offices, World Bank, UniCredit Research
Slow fiscal adjustment due to Governments will try to smooth the economic downturn mostly by subsidizing private
large energy subsidies
consumption. Despite companies being worse hit than households in the current energy
crisis, CEE governments continue to focus on capping prices for retail consumers and/or
covering part of the higher energy costs. We expect CEE governments to subsidize energy
prices and increase transfers to companies to alleviate pressure on production costs. Unless
international energy prices fall and/or the EU partly covers subsidies out of common
borrowing, we expect budget deficits to fall very slowly in 2023-24, with all EU-CEE countries
but Croatia failing to return public shortfalls below 3% of GDP by the end of 2024 (Chart 3).
Serbia’s IMF agreement is likely to require tighter fiscal policy, while Bosnia-Herzegovina’s
limited borrowing options could cap the budget deficit at less than 1% of GDP.
Slower GDP growth in 2023 means that fiscal impulses are likely to turn negative in 2024, but
not disinflationary, if their transfer components remain large. This is especially true in
countries that face elections in 2023, namely Bulgaria, Poland, Slovakia and Turkey. Russia’s
fiscal effort will likely focus on boosting military capabilities at the risk of crowding out support
for categories worst hit by sanctions and shortages, such as pensioners and low earners.
Inflation likely to remain outside We expect fiscal policy to fuel core inflation in 2023 and 2024 in most CEE countries, slowing
target ranges in 2023-24 disinflation over our forecast horizon. Wage bargaining might add to demand pressure on
prices, as it is unlikely to slow sharply in 2024 after double-digit nominal wage increases in
2023. We expect retail prices for natural gas and electricity to increase throughout the region
by 10-20% per year in 2023-24, adding 0.1-1.2pp each year to headline inflation. Factoring in
higher food prices and the pass-through of higher corporate costs to consumer prices, we do
not expect inflation to return inside target ranges in EU-CEE before the end of 2024 (Chart 4).
By ignoring rising energy costs or delaying the payment of subsidies, CEE governments are
fueling cost-push inflation, with several negative effects, including: 1. prices are resetting
more often than in the past, 2. the pass-through from FX and commodity prices to inflation
has increased as producers try to anticipate further price increases and 3. the inflation
expectations of companies and households are unanchored, as shown by momentum rising
in all inflation components6 following shocks in energy prices and/or exchange rates.
6 Cyclical and non-cyclical core, energy and fuels, and food.

CHART 3: SLOW FISCAL ADJUSTMENT EXPECTED IN 2023-24 CHART 4: INFLATION OUTSIDE TARGET RANGES IN 2023-24
Budget deficit, % of GDP 2022F 2023F 2024F Inflation forecast 2022F 2023F 2024F Inflation target
eop, yoy, %)
0.0
24 80
-1.0 21 70
-2.0 18 60
15 50
-3.0
12 40
-4.0
9 30
-5.0
6 20
-6.0 3 10
-7.0 0 0
BG SK CZ RO TR RU HU PL SI RS HR BH HR SI BH BG RS RU RO SK CZ PL HU TR
(rs)
Source: national statistical offices, European Commission, UniCredit Research
Limited scope for additional rate CEE central banks are determined to limit further monetary tightening, despite the strong
hikes…
inflation momentum and the uncertain pace of disinflation. The CNB, the NBP, the CBRT and
the CBR have signaled they will remain on hold into 1H23. We expect the NBR to align with
the CNB by taking its policy rate to 7% in early 2023, while the NBS might have to increase
its policy rate to around 5% if it wants to maintain a stable EUR-RSD. All these central banks
prefer to manage exchange rates instead of increasing interest rates for fear of hiking too
much into the global economic downturn. The NBH is the only EU-CEE central bank that
cannot intervene efficiently in FX markets because its FX reserves are too low in absolute
terms and when compared to excess HUF liquidity. For this reason, the NBH remains the
CEE central bank that might have to hike the most if risk appetite falls significantly.
Even if inflation starts falling in 2Q23, we see limited scope for rate cuts (Chart 5). CEE
…and for rate cuts in 2023-24 central banks currently forecast inflation to return to target by 2024 at the latest and potential
surprises might delay cuts. In addition, fiscal policy could be looser than monetary authorities
expect and rate cuts might be postponed as a result. Therefore, we see policy rates at
between 4.5% in Romania and 7% in Hungary by the end of 2024.
We see no scope for the CBRT to ease in 2023. If the opposition wins next year’s elections,
we expect sharp hikes to 45% to curtail inflationary pressure. A likely contraction in domestic
lending could be partly offset by large capital inflows and currency appreciation, which would
prevent financial conditions from tightening too strongly. The CBR might let the RUB
depreciate to account for external shocks and cut the key rate to 6.5% if inflation returns to
target by 2024.
FX interventions will remain
prominent
Without FX interventions, CEE currencies would depreciate due to terms-of-trade shocks and
FDI and EU fund inflows being insufficient to cover large current account deficits in most CEE
countries. Although we expect exports to recover gradually in 2023-24 and the energy bill to
fall slightly from this year’s highs, FDI is likely to trail the recovery. Only two EU-CEE
countries have received disbursements from the RRF so far in addition to the initial
prepayments: Croatia and Romania. We expect regular EU funds from the 2021-27 EU
budget to be sizeable from 2024 onwards because governments delayed tenders and
allotments due to the pandemic and the energy crisis. This leaves CEE economies reliant on
portfolio inflows and foreign loans, another reason why interest rates cannot decline too
quickly.
The capacity to intervene and the efficacy of FX sales differ across countries. The NBP, the
NBR and the NBS are the most efficient central banks when it comes to fighting currency
depreciation. Due to their FX reserves dwarfing excess liquidity, all three central banks can

raise FX implied rates well above the interbank interest rates in a short time, curtailing
currency sales. The downside is more volatility in short-term rates that could translate into
financial conditions remaining tighter for longer and, in Romania and Serbia, larger liquidity
premiums across interest rate and yield curves. This year, the CNB has sold around EUR
25bn (or a fifth) of its FX reserves plus EUR 2bn in FX investment income to stabilize the
CZK. The CNB might have to deplete its FX reserves faster than its peers if it wants to
prevent depreciation over the winter. The CBRT is borrowing to defend the TRY, a strategy
that will have to stop eventually.
CHART 5: LIMITED SCOPE FOR EASING IN 2023-24 CHART 6: MOST CEE COUNTRIES FACE NEGATIVE EBBS
Policy rates (%) 2022E 2023F 2024F Extended basic balances (% of GDP) FDI EU funds C/A EBB
15.0 50.0
12.0
13.5 45.0
9.0
12.0 40.0
6.0
10.5 35.0
3.0
9.0 30.0
0.0
7.5 25.0
-3.0
6.0 20.0
-6.0
4.5 15.0
-9.0
3.0 10.0
-12.0
1.5 5.0
2022F
2023F
2024F
2022F
2023F
2024F
2022F
2023F
2024F
2022F
2023F
2024F
2022F
2023F
2024F
2022F
2023F
2024F
2022F
2023F
2024F
2022F
2023F
2024F
2022F
2023F
2024F
2022F
2023F
2024F
2022F
2023F
2024F
2022F
2023F
2024F
0.0 0.0
RS CZ RO PL RU HU TR (rs)
RS TR HU SK RO CZ BH PL BG SI RU HR
Source: statistical offices, central banks, UniCredit Research
We assume no geographical or The scenario laid out above assumes that the conflict between Russia and Ukraine will not
non-conventional escalation of
the Russia-Ukraine conflict escalate to non-conventional weapons and/or spill over to the rest of Europe. However, we
also assume that fighting will continue into 2024 and that Russia’s economic decoupling from
the rest of Europe will not be reversed in the coming two years. This means that the negative
terms-of-trade shock that has affected European economies this year could continue for an
extended period. For the small, open economies in CEE, this would mean a further decline in
external competitiveness that would hamper a return to pre-COVID trade surpluses. For
Russia, sanctions could further reduce actual and potential growth for decades to come and
lead to deindustrialization, as feared by Russian economists7.
…although the risk of such There are many risks associated with this scenario. On the downside, the consequences of a
escalation is not negligible
wider conflict are difficult to assess, with the economic fallout dwarfed by potential human
and material losses. On the upside, a faster end to the conflict would allow European
economies to rebound quicker than we currently expect.
Besides the war between Russia and Ukraine, in our view, CEE faces the following main
political and geopolitical risks in 2023:
CEE needs a common European

1. Lack of a common European energy policy. Since February 2022, European countries
energy policy
have scrambled to acquire enough natural gas and oil to replace falling imports from
Russia. While separate strategies worked in the short term, they are a suboptimal long-
term solution for several reasons: 1. Individual bargaining power is lower than a common
EU approach that could lead to better contractual terms; 2. Individual countries, especially
in CEE, have limited fiscal capacity to offset the terms-of-trade shock; and 3. Without a
common approach, the EU might overinvest in the supply of natural gas, especially when
considering the green transition.
As pointed out in our 4Q22 CEE Quarterly, the availability of oil and oil products could be
a bigger risk in CEE than a potential gas shortage. The EU embargo on shipments of
7 The New Life of the Economy: Four Stages — ECONS.ONLINE

Russian crude will start on 5 December, followed by a similar ban on Russian-produced

oil and oil products on 5 February. CEE refiners estimate that it will take 9-16 months to
fully adapt their capacities to other types of crude oil, highlighting the risk of fuel shortages
(especially of diesel) until at least mid-2023. A dearth of urea, the active ingredient of
diesel exhaust fluid AdBlue, is compounding the threat to transport services in CEE.
In addition, natural-gas flows from Russia are unlikely to increase in 2023, when they
might amount to less than half of 2022 levels at best. As pointed out in numerous policy
papers issued by European think tanks8, Europe might need a common energy policy to
reduce uncertainty about future energy flows, stabilize prices and, if needed, subsidize
them for the most vulnerable retail and corporate consumers. EU-CEE and the Western
Balkans do not have the capacity to solve these problems on their own.
Weak adherence to the rule of 2. Weak adherence to the rule of law. The European Commission (EC) continues to
law in Hungary, Poland and withhold RRF funds from Poland and Hungary due to weak compliance with the rule of
Romania law. If it wins next year’s election, the Polish opposition could amend most contentious
laws to release RRF funds to Poland. In Hungary, the government would have to make a
U-turn to achieve a similar result. Elsewhere, the EC could further postpone Romania’s
Schengen inclusion if the Venice Commission issues a negative opinion about three
judicial laws adopted in November 2022. The laws are contested by associations of
magistrates, a large section of the civil society and the opposition, who claim that new
legislation would hinder the prosecution of corruption cases and reduce the independence
of magistrates.
3. Elections, populism and a lack of appetite for reform. Governments fighting for
Lack of reform appetite ahead of
elections in Bulgaria, Poland, reelection have done little to advance necessary reforms, be they social, economic or
Slovakia and Turkey fiscal. This is the case in Poland, Slovakia, Turkey and Bulgaria, with the latter at risk of
holding another parliamentary election in the spring, a fifth in less than two years. The EC
might demand a return to fiscal targets by 2024, which would require tighter public purses.
In the medium term, EU-CEE will struggle to comply with these targets without additional
structural reforms because dependency ratios and pension liabilities will increase sharply
towards the end of the decade.
A financial crisis looms in 4. Potential financial crisis in Turkey. If the CBRT and the government continue to pursue
Turkey if fiscal and monetary loose fiscal and monetary policies after next year’s elections, further capital outflows are
policies remain loose
likely. The CBRT’s net FX reserves would probably dip further below zero (they are
currently at around USD -58bn) and their eventual correction would require sharp
depreciation, inflation and a further loss of purchasing power. Turkey stands out in CEE
as the only country in which the number of households declaring some form of savings fell
between 2017 and 2021. Only 20% of Turkish households still have a financial cushion,
half the proportion in 2017. Since the pool of household savings continues to rise, this is a
sign of increasing inequality.
Nationalist tensions in the 5. Nationalist tensions in the Balkans. Following Russia’s invasion of Ukraine, the EU and
Western Balkans
the US have put increasing pressure on Western Balkan politicians to solve their existing
differences. So far, tensions between Republika Sprspka and the Croat-Bosniak
federation have subsided, while Serbia and Kosovo might be approaching an agreement
that would see the latter join international organizations without recognition by Belgrade.
The risk of tensions in the former Yugoslavia remains high.
Russia’s economic and political 6. Russia’s international isolation. Russia’s economic and political international relations
isolation if conflict continues
are unlikely to improve if the conflict with Ukraine continues. Since March 2022, imports
from the EU, China and India have fallen compared to last year and import substitution is
very limited, especially for technology and electronics. Embargoes and price caps on
energy exports could further weaken the Russian economy by reducing export and fiscal
revenues, possibly leading to RUB depreciation and inflation.
8 We highlight the outstanding work done at Bruegel, the latest paper on the topic being An assessment of Europe’s options for addressing the crisis in energy
markets (bruegel.org) published on 22 September 2022.

UK
The sick man of Europe
Daniel Vernazza, PhD, ■ The UK economy has entered a recession, which we expect to last for four quarters, with a
(UniCredit Bank, London) peak-to-trough decline of a little more than 1% of GDP. A modest recovery will likely follow
+44 207 826-7805 in 2024.
daniel.vernazza@unicredit.eu
■ We expect the BoE to hike the bank rate to a peak of 4% by March of next year. Rate cuts
are likely to start in 2Q24.
A recession lasting four We forecast real GDP growth of -0.7% next year, followed by a subdued recovery of 0.8% in
quarters
2024. The economy has likely already entered a recession, which we expect to last for four
quarters (from 3Q22 to 2Q23), with a peak-to-trough decline in GDP of a little over 1% (Chart 1).
Output contracted by 0.2% qoq in 3Q22 after expanding by 0.2% qoq in 2Q22, with monthly
GDP in September slightly below its pre-pandemic level. This weakness was partly driven by an
additional bank holiday in September for Queen Elizabeth II’s state funeral, but underlying
economic activity is slowing. Private consumption fell by 0.5% qoq in 3Q22, as did business
investment. The composite PMI fell further below 50 in October, to 48.2, and consumer
confidence remained near record lows. The housing market has slowed, reflecting much-higher
mortgage rates and reduced availability of credit. Much of the effect of monetary policy
tightening on output will materialize over the next year or so. About two million households will
come off two-year fixed-rate deals next year. A modest recovery is likely to occur in 2024.
Severely impaired supply side The UK economy is facing a sequence of particularly large supply shocks – from Brexit,
higher imported energy and food prices and a sharp rise in economic inactivity. Like the
eurozone, the UK faces a large terms-of-trade shock from surging prices for imported goods,
particularly for natural gas, and this is squeezing real incomes.
A very tight labor market The UK labor market is very tight, with one job vacancy for every unemployed person,
compared to 0.6 before the pandemic. Labor-market tightness has been driven by a surge in
economic inactivity of more than half a million workers (aged 16 to 64), mostly due to long-
term sickness (Chart 2). In addition, lower net migration, in part due to Brexit, has slowed
growth in the working-age population. Reflecting the tight labor market, as well as
compensation for high actual inflation and high short-term expectations of inflation, nominal
wage growth is very high. Private-sector regular pay growth was 6.6% yoy in 3Q22, up from
3% before the pandemic, although this is still materially lower than CPI inflation. The labor
market is softening, with job vacancies on a declining path. We expect unemployment to start
rising in 1H23.
CHART 1: ENTERING A FOUR-QUARTER RECESSION CHART 2: INACTIVITY DUE TO LONG-TERM SICKNESS
Real GDP qoq (%) Real GDP yoy (%, rs) UK economically inactive: male aged 16-64, thous.
7.0 30.0 3800 1200
6.0 25.0 Total Long term sick (rs)

3700 1150
5.0 20.0
Forecast
4.0 15.0 3600 1100
3.0 10.0
3500 1050
2.0 5.0
1.0 0.0 3400 1000

0.0 -5.0
3300 950
-1.0 -10.0
-2.0 -15.0 3200 900

4Q20 2Q21 4Q21 2Q22 4Q22 2Q23 4Q23 2Q24 4Q24 Mar-12 Sep-13 Mar-15 Sep-16 Mar-18 Sep-19 Mar-21 Sep-22
Source: ONS, UniCredit Research

Inflation has peaked and Inflation jumped to a 41-year high of 11.1% yoy in October, driven by electricity and gas
should ease quickly after the
winter prices, while core CPI inflation was unchanged at 6.5% yoy. We expect this to be a peak, as
the government’s Energy Price Guarantee will cap energy bills for the average UK household
at GBP 2,500 for the six-month period from October 2022 to March 2023, and from April at
GBP 3,000 for twelve months. We expect inflation, after likely remaining well above 10%
through the winter, to fall quickly to 3.7% in 4Q23 and to slightly below the 2% target by 2Q24.
Such a decline in inflation next year is likely to be driven by stabilizing energy prices, lower
aggregate demand, higher unemployment, and modest improvement in the supply side. Core-
goods-price inflation has already shown signs of moderating (Chart 4), while core-services-
price inflation will likely turn south once unemployment starts rising.
Tighter fiscal policy In his Autumn Statement on 17 November, UK Chancellor Jeremy Hunt announced two new
fiscal rules: 1. underlying debt as a share of GDP to be falling by the fifth year of a rolling five-
year forecast; and 2. public sector borrowing must be below 3% of GDP by the fifth year of a
rolling five-year forecast. This is a loosening of the fiscal rules compared to the previous ones,
extending the period to five years from three to meet the rules, and replacing the fiscal rule to
balance the current budget with a more general 3% of GDP cap for the overall budget deficit. To
meet the new rules, and given the deterioration in the economic outlook, Mr. Hunt announced a
fiscal tightening of about GBP 55bn (more than 2% of GDP), roughly equally divided between
spending cuts and tax rises (through freezing and cutting various tax thresholds, while keeping
headline rates of tax unchanged). The fiscal tightening will mostly – but not all – be delayed until
after 2024, which is after when the next general election will have to take place.
We expect the BoE bank rate to The BoE raised the bank rate by 75bp on 2 November (its largest single hike since 1989) to
peak at 4% in March; first rate
cut in 2Q24 3.00%. However, less-hawkish tones were expressed during this meeting. Two of the nine-
member Monetary Policy Committee (MPC) dissented in favor of a smaller hike, with one
preferring a 25bp hike. A majority on the MPC judged that further rate hikes will likely be
required, but the MPC took the highly unusual step of making a clear statement to financial
markets that they were pricing in too many hikes, based on a market-implied path that rose to
5.25%. We expect the bank rate to peak at 4% in March 2023, with a 50bp hike in December
and 25bp hikes in February and March. As soon as there is clear evidence that inflation is
moving down to 2%, the MPC is likely to cut rates steadily, likely starting in 2Q24.
CHART 3: CONSUMER CONFIDENCE IS NEAR RECORD LOWS CHART 4: CORE SERVICES INFLATION IS STILL RISING
UK consumer confidence, differences from averages since 1997 UK CPI, % yoy

14.0 70
(number of standard deviations)
2.0 Headline Core goods Core services Energy - rs
12.0 60
10.0 50
1.0
8.0 40
0.0 6.0 30
4.0 20
-1.0
2.0 10
0.0 0
-2.0
Consumer confidence -2.0 -10
Unemployment expectations (inverted)
-3.0 -4.0 -20
Oct-10 Oct-12 Oct-14 Oct-16 Oct-18 Oct-20 Oct-22
-4.0 Note: Core goods CPI excludes energy, food, non-alcoholic beverages, alcoholic beverages and tobacco.
Core services CPI excludes airfares, package holidays and education.
Oct-06 Oct-08 Oct-10 Oct-12 Oct-14 Oct-16 Oct-18 Oct-20 Oct-22
Source: ONS, UniCredit Research

Sweden & Norway

Tight monetary policy set to weigh on growth
Chiara Silvestre, Widespread growth in inflation, increases in interest rates, a slowing housing market and weaker
Economist
(UniCredit Bank, Milan) global growth prospects will likely result in a slowdown in the economies of both Sweden and
chiara.silvestre@unicredit.eu Norway in the next two years. In both countries, the deterioration of household purchasing power
due to strong price growth and rising mortgage rates has started to make consumers more
High inflation and rising pessimistic, leading to an easing in private consumption. Together with consumers, businesses will
mortgage rates are hitting probably also face tough times due to capacity constraints, higher input prices, labor shortages and
economies everywhere
rising electricity prices. At the same time, the global economic slowdown will hurt Swedish and
Norwegian exports.
In Sweden, after growing by 3.2% in 2022, GDP will likely decelerate significantly to 0.2% in 2023.
We forecast a slow recovery in 2024, with growth rising to a below-potential 1.5%. Next year, fiscal
Sweden: GDP to slip in 2023 policy is expected to provide compensation to households and firms for high power prices.
and recover in 2024, but below However, the terms of the government support remain unclear and are unlikely to prevent a decline
potential
in both consumption and investment. After peaking at above 8% around the turn of the year, CPIF
inflation is forecast to decelerate quickly, averaging 4.5% in 2023 and 1.5% 2024.
The Riksbank (RB) raised its policy rate by a cumulative 175bp between April and September.
Riksbank to hike to 2.25% by However, the RB’s tightening job does not appear to be done and two more rate hikes are likely in
1Q23 and cut to 2.00% by end- 4Q22 and 1Q23. After peaking at 2.25%, the policy rate will probably remain on hold until inflation
2024
returns to levels below 2%. This will lead the RB to start cutting rates in 2H24. We expect two 25bp
cuts with the policy rate reaching 1.75%.
In Norway, mainland GDP is forecast to increase by 3.1% in 2022, before easing to 0.8% in 2023
Norway: GDP to ease and picking up to 1.6% in 2024. As a supplier of oil and gas, the Norwegian government will receive
significantly in 2023 and
recover slightly in 2024 significant income from high petroleum and gas prices. Consequently, increasing activity in the oil
and gas sector will likely mitigate the expected GDP slowdown over the next two years. High
energy prices drove CPI inflation above 7% and base effects are likely to cause inflation to decline
fast, averaging 5.7% in 2023 and 2.3% in 2024.
The Norges Bank (NB) is close to concluding the current round of monetary tightening that began in
Norges bank to tighten to
September 2021. We expect the NB to deliver two 25bp hikes, one in 4Q22 and one in 1Q23, lifting
3.00% by 1Q23 and cut to
2.50% by end-2024 the policy rate to 3%. Once inflation comes back to levels more consistent with 2% target, in 2H24,
the NB will probably begin to cut policy rate, delivering two moves of 25bp each. At the end of 2024,
the policy rate will likely be brought down to a less restrictive 2.50%.
CHART 1: FAST-RISING INFLATION IS LEADING … CHART 2: …CENTRAL BANKS TO TIGHTEN FAST, BUT NOT
FOR LONG
yoy (%) Headline CPI Policy rate (%)

12.0 2.50
EMU Sweden Norway
10.0 2.00
EMU Sweden Norway
8.0 1.50
6.0 1.00
4.0 0.50
2.0 0.00
0.0 -0.50
-2.0 -1.00
Mar-18 Feb-19 Jan-20 Dec-20 Nov-21 Oct-22 Mar-18 Nov-18 Jul-19 Mar-20 Nov-20 Jul-21 Mar-22 Nov-22
Source: ECB, Eurostat, Norges Bank, Riksbank, Statistics Norway, Statistics Sweden, UniCredit Research

Switzerland
SNB to hike twice more
Dr. Andreas Rees, We forecast real GDP rising by 2.3% in 2022, 0.4% in 2023 and 1.3% in 2024. However, the
Chief German Economist
(UniCredit Bank, Frankfurt) Swiss economy is set to shrink moderately in qoq terms at the turn of this year before growing
+49 69 2717-2074 again from 2Q23 onwards. The forecast risks are skewed to the downside in light of
andreas.rees@unicredit.de
substantial geopolitical and macroeconomic uncertainty, especially for 2023.
Light recession likely Besides higher energy costs for households and companies, shrinking global trade at the turn of
the year in combination with a strong Swiss Franc is likely to weigh on the export-dependent Swiss
economy. Furthermore, surging interest rates will probably dampen construction activity, especially
in the housing market (Chart 1). However, compared to other European countries, the Swiss
economy is less vulnerable to fossil-fuel price increases, as more than half of its energy
consumption comes from hydroelectric power, nuclear power and renewables.
Inflation outlook more benign Although a strong hike in electricity prices has been announced for January 2023 (+27% after
than for the rest of Europe
largely unchanged prices in the previous two years), we expect consumer prices to increase less
markedly than in many other European countries. For 2023, consumer prices are likely to rise by
about 2% after 2.9% in 2022 (2024: +1%). Strong wage hikes, which could fuel inflationary
pressure, continue to be unlikely despite a tight labor market. Recently, the unemployment rate
has declined further, to 2.1%, its lowest level in more than 20 years, while job vacancies have
remained close to record-high levels (Chart 2). However, the latest surveys among Swiss
companies continue to signal only moderate wage increases. For 2023, business managers
expect a rise of about 2% on average across sectors after wage hikes of 1% in 2022.
SNB to hike twice more The combination of the rather low dependance on fossil fuels, inflation-dampening effects of the
strong Swiss franc and moderate wage growth puts the SNB in a comparatively comfortable
position. However, we continue to expect policymakers to hike twice more, by 50bp at the next
meeting in December and by 25bp in March 2023, in order to be ahead of the curve. This would
lead to the depo rate peaking at 1.25% and to total monetary tightening of 200bp. We expect
the lack of strong upward wage pressure and disinflation to allow the SNB to cut rates from
mid-2024 onwards, probably two times by 25bp each.
Negotiations between the EU The negotiations between the EU and Switzerland have been stalling, as signaled by the recent
and Switzerland stalling
delay of conclusions by the European Council on Switzerland, which were to set out future work on
specific policy areas. In May 2021, the Swiss Federal Council scrapped a planned framework
agreement with the EU on bilateral relations after seven years of negotiations.
CHART 1: MORTGAGE RATES SURGING CHART 2: TIGHT LABOR MARKET
In % Job vacancies, in 1,000

3.5 70
2 years 5 years 10 years
3 60
50
2.5
40
2
30
1.5 20
10
1
0
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
0.5
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
Source: SNB, OECD, UniCredit Research

China
A challenging environment
Edoardo Campanella, We expect GDP to expand by 4.2% in 2023 and by 3.6% in 2024. China’s macroeconomic outlook
Economist
(UniCredit Bank, Milan) remains fragile, with the latest PMIs tumbling into contractionary territory due to weak domestic and
+39 02 8862-0522 external demand. COVID-19 restrictions and outbreaks still weigh on private consumption. At the
same time, an impending global recession is taking its toll on exports, removing a key engine of
growth. But a just-announced relaxation of the zero-COVID strategy and more broad-based policy
stimulus are expected to support growth next year.
A fragile real estate sector In the short term, the greatest source of vulnerability is represented by a faltering real-estate sector,
which is going through both a cyclical and structural adjustment. COVID-related restrictions have
frozen or delayed real-estate transactions in several cities, while Chinese households are more
cautious about paying hefty down-payments for fear that financially distressed developers might not
complete their residential projects. Supply is adjusting, with land purchases plunging more than 50%
YTD and new home starts declining by a similar amount. The lack of developers’ appetite for new
projects is also due to a slowing urbanization process and unfavorable demographics that will weigh
on future demand.
Limited inflationary pressure is allowing the government to use its monetary-policy levers to support
Fiscal and monetary policies to a weak economy. Additional monetary easing is likely to come through a variety of targeted lending
remain supportive
facilities. We expect CNY-USD to regain ground, gradually returning towards 7.00 throughout our
forecasting horizon. On the fiscal front, most support is likely to come from infrastructural
investments at the local level. After months of reluctance, Beijing has recently shown willingness to
shore up the real estate sector with measures ranging from addressing developers’ liquidity to
loosening down-payment requirements for homebuyers.
Beyond current contingencies, China’s medium-term growth prospects do not look rosy. Besides
Xi’s third term bent on insulating
well-known structural issues such as an ageing and shrinking workforce, stagnating productivity and
China
elevated corporate debt, President Xi Jinping’s historic third term as the undisputed leader of the
country is likely to be marked by a more-inwardly looking, state-driven and assertive China. National
security in the form of economic self-reliance is seen as coming first now, before economic growth;
and this will weigh on China’s growth potential.
From a more geopolitical point of view, the greatest challenge will come from the tech decoupling
Tensions with the US driven by with the US. The Biden administration recently banned the export of high-performance microchips to
chips
China, hoping to establish control over advanced computing and semiconductor technologies that
are key to a modern military and economy. This raises risks related to the future of Taiwan, where
90% of the most sophisticated microchips are produced (Chart 2).
CHART 1: AWAY FROM THE PRE-PANDEMIC TREND CHART 2: TAIWAN IS A KEY FLASHPOINT FOR MICROCHIPS
China GDP (4Q19=100) Semiconductor manufacturing capacity for logic chips

140
(% of total)
Actual Pre-pandemic trend US China Taiwan South Korea Japan Europe Other
130
120 >45
110
Nanometers
28--45
100
90
10--22
80
70
<10
60
1Q16 4Q16 3Q17 2Q18 1Q19 4Q19 3Q20 2Q21 1Q22 4Q22 3Q23 2Q24
0% 20% 40% 60% 80% 100%
Source: Bloomberg, Boston Consulting Group, UniCredit Research

Oil
Brent prices to remain elevated
Edoardo Campanella, We expect Brent prices to average USD 100/bbl in 2023 and USD 92/bbl in 2024. In the short term, and
Economist
(UniCredit Bank, Milan) despite the demand destruction triggered by the mild global recession, we see oil prices peaking at
+39 02 8862-0522 around USD 105/bbl in 1Q23 as a result of the implementation of EU sanctions on Russian oil as well
as negative spillover effects from the natural gas market during the winter. Further out, we forecast a
declining trajectory that reflects the improving balance between supply and demand over the next two
years, while prices will remain elevated due to persistent geopolitical uncertainty and the ongoing
energy crisis in Europe.
A less tight market going OECD crude inventories are probably the best indicator to assess the tightness of the oil market. At the
forward moment, OECD inventories, whether compared to the pre-shale boom average or the 5-year MA, are
still low but are expected to rise somewhat and stabilize during 2023. The initial increase will be driven
by the demand decline triggered by the global recession, whereas the stabilization in the following
quarter will be driven by OPEC+ tapering off its just-approved output cuts and by more supply coming
from the US.
Supply to increase next year In early October, OPEC+ announced that it would cut November production by 2mb/d due to a
weakening macroeconomic outlook. Although actual cuts will be to the tune of 1mb/d given that
production for many members of the cartel is below their quotas, the cartel is showing its determination
to adjust production and avoid output surpluses that would bring prices down. Starting from 2Q23, when
the economic recovery should begin in the eurozone, we expect OPEC+ to announce a gradual
reversal of the curbs. Moreover, US producers are expected to increase their production by around
1.3mb/d in 2023, bringing it above 19mb/d.
Demand to surpass its pre- On the demand side, global oil consumption will likely decline by around 400k/bd in 4Q22 due to
pandemic levels in late 2023 worsening macroeconomic fundamentals that are partly compensated for by gas-to-oil shifts,
particularly in Europe. Demand is likely to move well beyond 100mb/d next year, especially in 2H23,
with central banks about to end their tightening cycle and economic activity likely to be on the mend.
War in Ukraine main bi- When looking at the risks, the war in Ukraine, with all its ramifications to the energy market, remains the
directional risk key source of bidirectional risk to our outlook. A full halting of Russian exports of natural gas to Europe
could push Brent above USD 110/bbl. Instead, a successful nuclear agreement with Iran would provide
price relief, injecting around 1.5mb/d of crude almost immediately, but such an outcome looks unlikely.
Moreover, a deeper-than-expected recession will cause a much worse deterioration of the demand
outlook, bringing prices down.
CHART 1: OIL PRICES TO PEAK IN 1Q23 CHART 2: OIL MARKET TO BECOME LESS TIGHT IN 2023
Brent (USD/bbl) OECD stocks minus pre-shale boom average

m/b
140 OECD stocks minus 5-year MA
600 Loose
Spot Futures UniCredit forecast
oil market
120 500
400
100
300
80 200
100
60
0
40 -100
20 -200
-300
0 Tight
Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 Jan-21 Jan-22 Jan-23 Jan-24 -400 oil market
Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 Jan-21 Jan-22 Jan-23
Source: IEA, Bloomberg, UniCredit Research

Natural Gas
A challenging, but surmountable, winter lies ahead
Edoardo Campanella, Natural gas prices at the Dutch TTF hub have dropped from historic highs but have stabilized
Economist
(UniCredit Bank, Milan) at elevated levels around EUR 120/MWh – six times higher than their 2015-20 average and
+39 02 8862-0522 almost six times higher than Henry Hub prices in the US. According to futures, prices are
likely to remain around current levels throughout 2023 before dropping towards EUR
100/MWh in 2024. However, there are risks that TTF prices might be higher in 2H23 than
futures suggest due to 1. Russia’s threat to fully halt natural gas delivery, 2. a tight global LNG
market at a time of recovering Asian demand and 3. a lack of spare floating storage and
regasification units. In a scenario of surging prices, we see a ceiling at around EUR 175/MWh.
Price volatility in the EU could be mitigated by a price cap that is under discussion.
Thanks to a combination of factors, we expect the EU to safely navigate the upcoming winter.
High storage and energy
saving measures… First, all the main European countries managed to fill more than 90% of their storage capacity
by the fall, surpassing an 80% target, and they have preserved most of it thanks to an
exceptionally mild October. Second, energy-saving measures of a different kind have allowed
a substantial drop in natural-gas consumption, albeit with non-negligible cross-country
variation. From January through October, the EU’s average demand destruction was close to
10%, which is, however, below the 15% voluntary-reduction target originally set for this winter.
… and supply diversification

Third, European countries have adopted a number of measures to reduce dependence on
across Europe Russian oil and enhance security of supply. The EU has ramped up LNG-import capacity,
either through the expansion of existing onshore regasification plants or through the hiring of
floating storage and regasification units. At the same time, individual countries have signed
new procurement agreements with north African and central Asian governments to diversify
their supplies. Thus, even if flows of Russian gas were completely halted, Europe is unlikely
to face problems of undersupply and rationing this winter.
The most interesting development associated with the current energy crisis is the explosion in
LNG might be less supportive LNG consumption. According to the IEA, global LNG trade expanded by around 6% yoy in the
next year first eight months of 2022. Such market dynamics were shaped by surging LNG demand in
Europe, which rose by 65% over the same period, triggering a realignment of LNG trade flows
around the world. In Asia, LNG demand fell due to high prices, COVID-19-related restrictions
in China and mild weather. But winter 2024 might be less benign for Europe on this front as
Chinese demand is likely to recover and Europe and Asia will compete to secure access to
spare floating storage and regasification units. According to industry reports, the sudden
increase in European demand will make the LNG market structurally short until around 2025
when new production capacity is expected to become available.
CHART 1: GAS PRICES TO REMAIN ELEVATED CHART 2: HETEROGENOUS REDUCTION IN CONSUMPTION
EUR/MWh Change in natural gas consumption Jan-Oct 2022 vs

350
Futures average 2019-2021 (%)
10
300
Dutch TTF Henry Hub 0
250
-10
200 -20
150 -30
-40
100
-50
50
-60
Luxembourg
Slovenia
Austria
France
Romania
Croatia
Hungary
Czechia
EU27
Spain
Poland
Sweden
Denmark
Estonia
Latvia
Slovakia
Ireland
Italy
Greece
Belgium
Lithuania
Finland
Portugal
Bulgaria
Germany
Netherlands
0
Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 Jan-21 Jan-22 Jan-23 Jan-24
Source: IEA, Bloomberg, UniCredit Research

Cross Asset Strategy

Stay with bonds for carry
Elia Lattuga, ■ 2023 is set to inherit non-trivial economic and market risks and we suggest entering the
Cross Asset Strategist,
Deputy Head of Strategy year with a defensive allocation, preferring fixed income to equities and developed to
Research (UniCredit Bank, Milan) emerging market exposure. Bonds offer attractive carry and superior risk-adjusted return
+39 02 8862-0851
prospects, in our view, while equities will face weak profitability and initially little tailwind
elia.lattuga@unicredit.eu
from valuations. We like IG and HY credit in Europe and retain a cautious view on duration.
■ The ongoing sharp monetary tightening and upcoming recession pose significant downside
risks. However, evidence of slowing core inflation, peaking official rates and signs of
economic recovery would pave the way for more risk taking in 2H23.
An extremely negative Negative returns for both bonds and equities, high correlation across assets and regions, wild
performance for a 60-40
portfolio swings in official rate expectations and heightened intraday volatility have been some of the
key features of market performance in 2022. Such negative performance in both fixed income
and equities has not been seen since late 1979-80, with this year’s performance of a 60-40
portfolio invested in US Treasuries and the MSCI World being so far lower than any annual
performance of such a portfolio in nearly 50 years. Normalization in real and nominal rates
and equity and credit spread valuations resulted from a massive monetary tightening aimed at
reining in the highest inflation rates of the past forty years. Geopolitical tensions, supply
bottlenecks and spiking energy prices were additional sources of risk for a market that had to
deal with the return of inflation risk, the end of negative rates, shrinking central bank balance
sheets and the lack of a central bank “put”. Commodities and the USD were among the few
assets delivering positive returns in 2022.
2023 is set to inherit non-trivial The macroeconomic backdrop and risk picture seems set to continue weighing on sentiment
economic and market risks
in early 2023, before a brighter outlook for 2024 – featuring lower inflation, economic
recovery, rate cuts – can sustain risk taking. That said, the fight for lower inflation is not over.
Inflation remains distant from Fed and ECB targets and more tightening is in the pipeline from
central banks that need tight financial conditions until inflation is on a sustainable downward
path. Hence, 2023 is set to inherit non-trivial economic and market risks from the massive and
concurrent monetary tightening being delivered across regions, from prospects of the US and
eurozone heading into a recession and lingering geopolitical risks.
Our recommendations in a We suggest entering 2023 with a defensive allocation, preferring fixed income to equities and
nutshell
developed to emerging market exposure as the USD will only gradually loosen its grip.
CHART 1: MARKET TENSIONS ACROSS ASSETS CHART 2: RETURNS FOLLOWING A PEAK IN THE FED FUND
EUR IRS 10Y Brent JPY Nasdaq iTraXX Xover 16%

2.5 3M 6M 12M
Returns following a peak in the fed fund rate
14%
Intraday moves, standardized levels
2.0
12%
(avg across past 5 cycles)
1.5
10%
1.0
8%
0.5
6%
0.0
4%
-0.5
2%
-1.0 0%
2015 2016 2017 2018 2019 2020 2021 2022
UST 3-5Y UST 10-30Y US IG Credit S&P 500 Commodities

Following the repricing in yields and spread levels, bonds offer an attractive carry, improved
protection from interest rate risk and superior risk-adjusted return prospects. Pressure on
profit margins is set to intensify as lower demand meets still high input costs. That said,
European corporate balance sheets are in good shape and we expect solid performances
from both IG and HY credit, while in the US, moving beyond IG is less attractive. Our view on
duration remains cautious for the time being due to the uncertain inflation outlook and QT
risks. This, in turn, also limits the upside in equity valuations at a time of weak prospects for
earnings growth. Moreover, the sharp monetary tightening poses significant risks and central
banks are set to continue seeking tight financing conditions in the coming months. However,
we suggest standing ready to add risk as the year progresses if there is evidence of slowing
core inflation, peaking official rates and signs of economic recovery.
Cyclical behavior Judging from past US economic cycles, in a recessionary environment equities and
commodities display the largest drawdowns but the magnitude of the losses is relatively mild if
there is no financial shock. Moreover, a downturn in the current very peculiar cycle should be
largely discounted, even if the rapid normalization of rates and the reduction in central bank
liquidity might still cause turmoil. A shift in the direction of monetary policy might change the
market scenario, something we expect to see over the course of the year. Performance
across assets tends to turn positive in the first few months following a peak in official rates
(Chart 2) as markets project easier conditions down the road. Long-dated bonds are the first
to benefit, but credit and equites tend to catch up quickly. We expect this to happen late in the
first half of next year as the downward trend in inflation gains pace, allowing for some rotation
from bonds into equities and some lengthening of duration exposure.
Bond-equity correlations Over the past twelve months, bonds failed to act as a hedge against equity losses like they
did in 2000-02, 2007-08 and somewhat in 2020 (albeit with very unstable correlations). It is
not unusual to see the equity-bond correlation rising to positive levels as rate hikes bear-
flatten the yield curve (Chart 3), even though the relationship between curve slope and
correlation was distorted by QE and ZLB. However, the return to the historical norm came
with an important difference: unlike in the past, bear-flattening and rising correlation happened
as bonds and equities delivered losses rather than gains. Higher carry and an already
hawkish picture in forward rates point to positive returns for bonds over the coming quarters
and an increase in their diversification ability as equity markets face material challenges.
Correlations might return to being positive again a few quarters down the road, when we see
a more benign inflation and growth outlook, as well as rate cuts, fueling a rally in both bonds
and equities.
CHART 3: FLATTER CURVE, HIGHER CORRELATION BUT CHART 4: BONDS CARRY APPEAL
WITH NEGATIVE RETURNS
7-10Y UST-MSCI World correlation 2-10Y UST (rs) 1.00

0.60 3.00 EUR HY
Vol adj. real E/P or Yld (5Y5Y swap Infl.)
0.80
0.40 2.50
US HY 2Y UST
2.00 EM (USD)
52W rolling correlation
0.20 0.60
1.50
Slope, %
0.00
0.40
1.00 SE 600
-0.20 US IG
0.50 0.20 10Y IT
-0.40 S&P 500 10Y UST 2Y IT
0.00 EUR IG
0.00
-0.60 -0.50
10Y GE 2Y GE
-0.80 -1.00 -0.20
2000 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 -30 -25 -20 -15 -10
Real performance (past 12M, CPI)

The return of carry Following the sharp rise in yields over the past few quarters, carry seems set to become a key
driver of performance in the years to come and to offer better protection against interest rate
and spread risks, which will likely linger in early 2023. This is the case for IG, but even more
for HY credit, which shows superior risk-adjusted-return prospects thanks to interesting yield
levels and largely diversified indices. Indeed, historically, HY has delivered above-average
returns in a diversified portfolio despite the large losses incurred during the financial crisis of
2007/08. Risks are related to a significant rise in default rates, coming from a deeper-than-
expected recession or from market tensions on the back of sharp monetary tightening. This
argues for caution in sector allocation and calls for a closer look at credit fundamentals.
Corporate balance sheets in Chart 5 shows a measure of credit risk for European corporates composed of five main
good shape
metrics, inspired by ECB’s analysis on European corporates vulnerability: financing and
rollover, debt service capacity, profitability, leverage and indebtedness, and economic activity.
European corporates are facing the ongoing deterioration in the economic and market outlook
from a solid starting point, which greatly reduces aggregate credit risks. Prolonged economic
weakness and persistently high funding costs over the next two years would progressively
push our indicator of vulnerability to a manageable 0.5 standard deviations above the
historical mean, possibly fueling more widening in spread levels.
Equities and geographic Solid balance sheets might protect credit performance, but weak profitability leaves equities
allocation
exposed to volatility over the coming months. In our projections, earnings growth for European
and US indices will be broadly flat across 2023 and very modest in 2024, and performance will
depend mainly on valuations. European equity valuations have often fallen below their long-term
mean but the impending recession and the risks coming from sharp monetary tightening
suggest a defensive allocation might be preferred. A brighter macro backdrop will call for a more
sanguine stance at a later stage in 2023. Energy prices and geopolitical developments remain
key risks to European equities but their cheaper valuations, a more favorable interest rate
environment compared to previous years, and possibly some diversification away from a rich
USD might allow for some outperformance compared to their US peers. However, the tide might
turn quickly when markets start to see lower inflation and Fed rate cuts draw near.
Risks and volatility Markets are accustomed to the stagflationary environment and higher geopolitical risk and have
priced in aggressive rates moves from the ECB and the Fed. However, a deep or prolonged
recession, the flaring up of US/China tensions or some major financial incident given the
ongoing tightening remain key risks to the downside. A quicker-than-expected disinflationary
trend or a stable solution to the Russia/Ukraine crisis might bring forward the expected swing in
sentiment. At any rate, the level of uncertainty surrounding economic, geopolitical and market
events as central bank liquidity is withdrawn is likely to keep volatility high across assets.
CHART 5: CORPORATE VULNERABILITY NOT A RED FLAG CHART 6: VOLATILITY IS HERE TO STAY
Financing & rollover Debt service capacity US financial condition index (BBG)
2.0 Profitability Leverage & indebtedness
Economic activity Composite Fed, ECB, BoJ, SNB combined balance sheets as a % of GDP (rs)
1.5 2 25
0 20
Standardized contributions
1.0
12M percentage point change
-2 15
Standardized level
0.5
-4 10
0.0
-6 5
-0.5
-8 0
-1.0
-10 -5
-1.5
-12 -10
-2.0
2000 2005 2010 2016 2021
2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024
Source: ECB, Haver, Bloomberg, UniCredit Research

FI Strategy
Dr. Luca Cazzulani, ■ Long-dated yields are likely to be close to their peaks. We see a bull-market revival
Head of Strategy Research,
FI Strategist (UniCredit Bank, Milan) triggered by convincing signals that inflation is easing. This will give central banks a green
+39 02 8862-0640 light to dial back some of the recent hikes, leading to lower yields and bull steepening.
luca.cazzulani@unicredit.eu
Kornelius Purps,
■ We expect the 10Y UST yield to be at 3.75% by end-2023 and at 3.10% by end-2024, with
FI Strategist (UniCredit Bank, Munich) the curve returning to a normal upward sloping shape only in late 2024.
+49 89 378-12753
kornelius.purps@unicredit.de ■ The 10Y EUR swap rate is likely to stay around 3% until 2Q23, before moving towards
Michael Rottmann, 2.50% in late 2023 and falling further in 2024. Bunds are likely to cheapen versus swaps,
Head of FI Strategy, reaching 60bp in 4Q23. We see the 10Y Bund yield at 2% by end-2023 and at 1.80% by
FI Strategist (UniCredit Bank, Munich) end-2024.
+49 89 378-15121
michael.rottmann1@unicredit.de
■ We see the 10Y BTP-Bund spread close to 240bp in the first part of 2023 due to higher
Francesco Maria Di Bella,
ECB rates and abundant supply, while tightening once rate cuts come into the radar screen
FI Strategist (UniCredit Bank, Milan)
+39 02 8862-0850 and the growth outlook improves. Implementation of quantitative tightening (QT) by the
francescomaria.dibella@unicredit.eu ECB will likely be gradual, ultimately avoiding major volatility.
■ High supply and QT are likely to take a toll on SSA bonds, especially on supranationals.
We expect SSA bonds to outperform core EGBs in a context of cheapening versus swap.
USTs: the year of the bull-market revival

We expect 1H23 to be marked After a rough 2022, when the effect from 12 years of declining yields was wiped out in a
by high volatility, with a bull-
market revival starting in 2H23 matter of months, yields are likely to remain elevated and highly volatile in 1H23. We expect
the 10Y UST yield to decline in 2H23 and in 2024 with inflation rates moving sharply lower.
Unlike in former cycles (except for 2006), we doubt that any U-turn in yields will occur quickly.
Prominent Fed critics like Mr. Summers and Mr. Dudley are not getting tired of reminding
markets that tightening so far has not had a material impact on the labor market, which is still
uncomfortably tight from an inflation perspective and might prevent a rally early in 2023.
Our 10Y yield targets: 3.75% by Only from 3Q23 onwards, with the disinflationary trend likely to accelerate, do we expect to
end 2023 and 3.10% at end
2024 see a shift to a bull trend in anticipation of an upcoming easing cycle (Chart 1). A total of
150bp cuts during 2024 (with the Fed funds rate down from 5% to 3.50%) are projected to
bring the 10Y yield down to 3.75% at the end of 2023 and to around 3.10% by end 2024.
Regarding the composition of the nominal 10Y yield at the end of our forecast horizon, we
assume 10Y BE inflation will come down to around 2.3% and, with inflation almost at target
and the economy not even reaching its normal cruising speed of slightly below 2%, the 10Y
real rate is projected to drop into the 0.5% to 1.0% area in the course of 2024.
CHART 1: EASING INFLATION TO PUSH 10Y UST YIELD LOWER CHART 2: WE EXPECT THE US CURVE TO STAY INVERTED
10 10 8 c
700
9 US key rate (mid) 9
Forecast 6 600
10Y UST UniCredit Research
8 8 500
CPI yoy in % 4
7 core CPI yoy in % 7
400
6 6 2
300
5 5 0
c 200
4 4
-2
100
3 3
-4 0
2 2
1 1 -6 -100
US key rate (ls) 10Y UST (ls) 2-10Y spread (rs)
0 0 -8 -200
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
2022
2024
2019 2020 2021 2022 2023 2024 2025

An important aspect of our forecast is that we judge current levels of distant money-market
forwards as hugely exaggerated. Right now, around 100bp of rate cuts in 2024 and shortly
thereafter are priced into money-market forwards, implying a longer-term equilibrium level
around 3½%. Gone are the days when disinflation, financial repression and the secular-
stagnation hypothesis were buzzwords frequently used to justify assumptions of low levels of
the long-term equilibrium for the natural rate. The current equilibrium level according to
money-market forwards for US policy rates implies a kind of a paradigm shift back to an old
normal, i.e. a return to the great moderation that prevailed from 1995 to 2005. This market
perception is at odds with the messages coming from FOMC members. According to the
median longer-run dot, the neutral rate is still seen at 2.5%, which is nowhere close to the
3.5% level associated with money-market forwards. We strongly believe that, with inflation
coming down in 2H23 and rate-cut expectations taking over, longer-run assumptions will also
shift downwards. In our view, by end-2023 and end-2024, rates will be lower than suggested
by current forwards. Our end-2023 target for 10Y UST yields is 3.75%, roughly in line with
current forwards, and our end-2024 target of 3.10% is well below the forward rate of 3.75%.
The curve should return to a We expect the US yield curve to follow traditional bear-flattening/ bull-steepening cycles in the
normal shape only in late 2024
next two years. The more restrictive monetary policy gets, the deeper the inversion of the curve
will become. With key rates still edging higher, we might not have seen the maximum inversion
in the 2/10Y spread but, unless the tightening cycle goes above a level of 5.50%, room for
further inversion appears limited. Typically, curves tread water once key rates plateau, with bull
steepening materializing only once the easing cycle is well-advanced (Chart 2).
We do not see many reasons to expect that this time will be different. With the tightening cycle
coming to an end in1Q23 but the key rate unchanged until year end, we expect to see the 2/10Y
spread largely unchanged at -50bp at the end of 2023 but flipping into positive territory during
2H24, when we expect the Fed to ease rates at a more-aggressive 50bp per quarter.
Eurozone: lower yields, flattish curve

Our view in a nutshell: lower Long-dated yields in the eurozone are likely to stay highly correlated with US ones. Inflation
yields and bull steepening
once focus moves to policy will be the key variable to watch. Signals of easing price dynamics will give central banks a
easing green light to return to a more-neutral policy stance, sending yields lower and prompting curve
bull-steepening. Investors have jumped the gun already a few times on this; and before
inflation can be declared to be going downhill, some slack in the economy will have to show
up. While waiting for it, central banks are likely to keep their rhetoric hawkish to prevent
financial conditions from easing too early. A sustained decline in long-dated yields is still
some quarters away.
CHART 3: 10Y SWAP WHEN TIGHTENING CYCLE PEAKS CHART 4: SWAP RATES AND UNICREDIT FORECASTS
1.6 3.5
2000 Depo rate
1.4
3.0
2004 2Y EUR
10Y swap - expected peak rate
1.2
2022 2.5 10Y EUR
1.0
2.0
0.8
1.5
0.6
1.0
0.4
0.5
0.2
0.0 0.0
-0.2 -0.5
-150 -120 -90 -60 -30 0 30 60
Calendar days to tigthening peak -1.0
Dec-18 Dec-19 Dec-20 Dec-21 Dec-22 Dec-23 Dec-24
ECB depo assumed to peak in March 2023. Peak rate is defined as the
maximum 1M OIS ffwd over the coming two years

Any forecasting exercise for eurozone yields based on macroeconomic fundamentals and
monetary policy will need to start from swap rates, given that several segments in the
eurozone sovereign-bond market are heavily influenced by scarcity.
10Y EUR swaps are expected Given that we expect the ECB’s depo rate to peak at 2.75% (by March 2023), and as forwards
to trade close to 3% until mid-
2023 appear somewhat more aggressive with a 3% peak, we project that 10Y swap rates will
remain around 3% until mid-2023, before moving towards 2.50% in late 2024.
During the 2004 tightening cycle, the 10Y swap rate was around 20bp higher than the
expected ECB peak rate. This spread is now tighter, which probably reflects that the ECB will
be hiking into restrictive territory to keep inflation expectations under control, but this will likely
be only temporary, and easing should follow once the inflation is back under control.
10Y swap rates in the long term In the medium term, the10Y swap rate should be determined by an equilibrium level for the
should converge towards 1.75-
2.5% BE inflation and the real yield. With respect to BE, we see an equilibrium in the 2.2-2.4%
range under the assumption that the ECB is perceived as credible with respect to its inflation
goal and taking into account an inflation risk premium. The equilibrium real rate is probably
negative or slightly positive at most given that 10Y real swap rates averaged -0.60% in the
past ten years and we do not expect the fundamentals to have changed dramatically after
COVID-19 and the conflict in Ukraine. Hence, a range for the equilibrium nominal level might
be 1.75-2.50%.
We do not expect much upward Since the pandemic, EGB curves have been flatter than in the past, likely due to quantitative
pressure on yields from QT
easing (QE). Will this change once the ECB starts reducing its asset portfolio? We do not
think so: QT, which we expect to begin in 2Q23, is likely to start at a very gradual pace of
around EUR 15bn per month and involve only the APP portfolio. This will likely create only
moderate pressure at the long end. For more details see: Strategy Flash - Rates - The ECB´s
next stop: balance-sheet reduction.
Curve to remain flat in the With the ECB likely to keep its rhetoric on the hawkish side and to keep hiking rates, and with
coming months, bull
steepening is the next chapter increasing signals of a growth slowdown, we expect the swap curve to remain remarkably flat
in the coming months. We do not see a strong reason for a pronounced and long-lasting
curve inversion, as monetary policy in the eurozone will likely become only moderately
restrictive. Accordingly, we expect the 2Y swap rate to be trading around 2.50% by end-2023
and around 2% at the end of 2024 (in line with our expected depo rate). The next big curve
trend is likely to be a bull steepening once rate cuts come into the radar screen, but this is a
story for 2024.
CHART 5: WE EXPECT THE CURVE TO BULL-STEEPEN ONCE CHART 6: 10Y BUND-SWAP VS. OUR FAIR-VALUE MODEL
RATE CUTS COME INTO THE RADAR SCREEN
200 4.0 100

Residual
2/10Y Bund
3.5 10Y GE Sw SP
Depo (rs)
80
Fit
150 3.0
60
2.5
Swap spread (bp)
100 2.0
Spread (bp)
40
Yield (%)
1.5
20
50 1.0
0.5 0
0 0.0
-20
-0.5
-50 -1.0 -40

Dec-12 Dec-14 Dec-16 Dec-18 Dec-20 Dec-22 Dec-24 Jan-99 Jan-02 Jan-05 Jan-08 Jan-11 Jan-14 Jan-17 Jan-20

We expect to see Bund-swap After the strong tensions in 2022, we expect Bunds to cheapen versus swaps, reaching a
spreads easing toward 60bp by
year-end… spread of 60bp in 4Q23 and 55bp at the end of 2024. First, with ECB policy rates getting
close to a peak, the need to hedge interest-rate risk will diminish significantly, removing a
source of upward pressure from swaps. Second, issuance, QT and TLTRO reimbursement
will reduce scarcity to some extent. Third, we see risk appetite gradually improving in 2023,
which would also reduce the case for the richness of Bunds.
…and 10Y Bund yields at 2% at Combining our forecasts for Bund-swap spreads and for swap rates, we project that the 10Y
end-2023
Bund yield will be at 2% by end-2023 and at 1.80% by end-2024.
Money-market rates are We expect excess liquidity to remain abundant enough in 2023 to keep money-market rates
expected to remain anchored
to the depo rate reasonably anchored to the depo rate. The 3M Euribor rate should peak around 2.80% in
3Q23. We do not anticipate a meaningful tightening in the €STR-depo spread, although with
excess liquidity shrinking, risks are tilted in this direction.
High carry and falling yields After the aggressive monetary-policy tightening in 2022 generated a very poor performance
bode well for a positive
performance in 2023 for fixed-income assets (up to 15-20% for the 10Y area and around 4-5% for the 1-3Y bucket),
yields are now at a historically attractive level and offer an appealing carry. This, coupled with
our view that yields will likely decline over the medium term, implies that investors should stay
long in terms of duration. This prescription needs to be balanced against the fact yield curves
are currently flat (inverted in the US). The best risk reward is probably offered by the 5Y tenor.
Returns on USTs are expected to be higher than those on Bunds.
ILBs should be seen as a ILBs also delivered losses in 2022 but for a second year in a row outperformed nominal
hedge
bonds, mostly as BE increased and inflation rose even higher. In 2023, we see real yields
coming down and, with spot inflation easing, we expect BE to decline. As a result, ILBs are
expected to deliver positive returns but not to outperform nominal bonds. Still, ILBs offer a
hedge in the current environment characterized by high uncertainty and by the possibility that
inflation will continue to overshoot central bank targets in the medium term.
CHART 7: EXPECTED RETURN ON SOVEREIGN BONDS CHART 8: EXPECTED RETURN ON ILBS
30 10
IT GE US
25 8
20
6
7-10Y Index total return
15
1-10Y ILB total return
4
10
2
5
0
0
-2
-5
-4
-10
-6
-15
-8
-20 GE ILB US ILB
-10
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023e
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023e

BTPs caught between high supply, QT and peaking policy rates

The ECB has posed a major Tighter monetary policy and higher yield volatility have created a challenging environment for
challenge to BTPs…
BTPs in 2022, with TPI helping contain the impact of political uncertainty. The BTP-Bund spread
widened from 135bp in early 2022 to around 200bp in mid-November. About half of this
widening has been due to Bund richness versus swaps rather than BTP-specific factors.
Therefore, the clearest way to discuss the outlook for BTPs is to focus on the BTP-swap spread.
…and we expect monetary Monetary policy will likely remain a key driver of BTPs in 2023. First, high yields, together with
policy to remain a key driver in
2023 weak real GDP growth, will keep investors focused on the cost of funding and debt dynamics.
When assessing debt sustainability, many investors tend to extrapolate recent trends of
higher interest rates into long-term equilibriums, while we are more constructive and believe
that restrictive monetary policy will be followed by a reversal towards neutrality in 2024.
QT poses a challenge to BTPs Second, QT will pose a challenge amid rising net supply. ECB purchases have exceeded the
in a context of high net
issuance… supply of BTPs in recent years. This will change in 2023 when net issuance of BTPs to private
investors is expected to be sizable (Chart 10). This creates scope for spread widening, even
though past experience suggests that pressure should not be taken for granted.
2019 is a useful reference in this regard. Back then, the ECB reduced its holdings of BTPs
due to redemptions in the Securities Market Program and no net purchases under the APP.
Net issuance was a robust EUR 65bn, but also thanks to high carry, foreign investors stepped
in sizably and BTP spreads tightened significantly. Next year, we expect net supply to be
around EUR 90bn, higher than in 2019. Carry is attractive enough, but lower than it was in
2019. Therefore, our baseline scenario is for spreads to widen.
It will be crucial that the political outlook is sufficiently stable to attract foreign investors. We
are fairly constructive here, as we do not see any incentive for the Italian government to put
the execution of the RRP at risk and we remain convinced that it is in Italy’s best interest to
proceed along a path of cooperation with the EC and the EU.
…but the ECB is committed to Third, the ECB will need to act very carefully on QT given risks to the transmission mechanism.
avoiding fragmentation.
Flexible reinvestments and TPI Indeed, we expect a modest EUR 15-20bn of BTPs will move from the ECB’s balance sheet to
will also help private investors in 2023. Although episodes of temporary volatility cannot be ruled out, our central
view is that QT will not be a major source of pressure for BTPs, not least because the central bank
has set up two lines of defense in the form of flexible PEPP reinvestments and the TPI.
Our BTP-Bund spread Overall, we expect the 10Y BTP-swap spread to widen to around 160bp in the next few
forecasts
quarters, with the 10Y BTP-Bund spread peaking at 240bp. As the ECB progressively moves
from peak rates to rate cuts, we expect spread tightening in late 2023 and into 2024, against
both swaps and Bunds.
CHART 9: ECB EXPECTATIONS AND THE BTP-BUND SPREAD CHART 10: BTPS – HIGH NET ISSUANCE EXPECTED IN 2023
200
275 3.5 ECB Foreign
10Y BTP-Bund
Domestic Net iss. ex-ECB
250 ECB peak rate (rs) 3.0
150
2.5
225
93
10Y BTP-Bund spread
2.0 100
200
Yield (%)
EUR bn
1.5 64
175 50
1.0
24
150
0.5 0
-10
125 -19
0.0 -38
UniCredit -50 -46
100 -0.5
forecasts -68 -69
75 -1.0 -100
Dec-20 Dec-21 Dec-22 Dec-23 Dec-24 2015 2016 2017 2018 2019 2020 2021 2022e 2023e
Source: Bank of Italy, ECB, Bloomberg, UniCredit Research

Supranationals facing high net supply and QT

Julian Kreipl, CFA, ■ In the SSA market we expect to see gross supply of more than EUR 400bn. We expect
Credit Strategist – ESG
(UniCredit Bank, Munich) supranationals to tap the market for up to EUR 160bn in net funding while most other SSA
+49 89 378-12961 segments are likely to require limited positive net funding.
julian.kreipl@unicredit.de
■ High net supply will likely occur as the ECB reduces its balance sheet, which will take its
toll on SSAs, especially supranationals and the EU. We expect SSAs to outperform core
EGBs in a context of swap spread cheapening.
Gross supply at pandemic Gross supply in the euro SSA market is expected to increase in 2023 compared to this year,
levels while net supply reaches
new highs reaching around EUR 400bn (with redemptions of EUR 225bn) in line with levels seen during
the COVID-19 pandemic in 2020-21. While net supply from agencies, regions and public
banks will be limited, close attention will be paid to supranationals, from which we expect
significant net supply, especially from the European Union (EU). The funding needs for NGEU
were below expectations in 2021 and 2022 but in 2023-26 EU funding will average more than
EUR 150bn as its implementation in member states advances. Furthermore, in 2023, NGEU
funding will be augmented by additional so-called MFA+ funding to support Ukraine worth
EUR 18bn and refinancing worth EUR 3.6bn, which will bring total EU funding to around EUR
170bn. For overall ECB-eligible supras issuance, this translates into net supply of around
EUR 160bn, as the EIB will also be more active and introduced a new program to support
REPowerEU with additional funds.
QT: supranationals will be most The details of when and how QT will start are yet to be defined by the ECB possibly at its
affected
December meeting, and any impact will heavily depend on the configuration of QT. We think
its implementation is likely to start in 2Q23 with an annual reduction of the APP portfolio of
about 5%. Among SSAs, supranationals are the most exposed to QT, and a 5% reduction
would mean that roughly EUR 11bn of the EUR 26bn in expected total ECB supra
redemptions in the PSPP would not be reinvested in 2023. QT will therefore further increase
the largely positive net supply from supranationals to private investors (Chart 12).
SSAs expected to outperform Spreads in the SSA market will be influenced by the above-discussed net supply and QT, but
EGBs
also by TLTRO repayments and easing of the scarcity that distorted prices and Bund-swap
spreads. After a broadly sideways movement in the first half of next year, we expect the
second half to see swap spreads declining by 20bp to 60bp and current high G-spreads
coming down, which is when we expect tight valuations of SSAs versus swaps to cheapen by
5bp to 10bp. However, in terms of total return, we expect SSAs to outperform EGBs and the
iBoxx EUR SSA to yield a total return of 3.5-4%.
CHART 11: SSA SPREAD DEVELOPMENT CHART 12: SUPRAS NET SUPPLY AND ECB NET PURCHASES*
iBoxx € Public Banks iBoxx € Supranationals ECB net purchases of supras Supras net supply Net supply (post ECB)
50 200
iBoxx € Regions iBoxx € Agencies
40
150
30
20 100
EUR bn
bp
10
50
0
0
-10
-20 -50
-30
Jan-21 Apr-21 Jul-21 Oct-21 Jan-22 Apr-22 Jul-22 Oct-22 -100
2018 2019 2020 2021 2022e 2023e
*UniCredit estimates Sources: iBoxx, Bloomberg, ECB, UniCredit Research

FX Strategy
A lower USD, but not a complete reversal of its strength
Roberto Mialich, ■ We expect the Fed to end rate hikes in 1Q23 and to start an easing cycle in 2024, a picture
FX Strategist
(UniCredit Bank, Milan) that will likely force the USD to further loosen its grip, although its strength is unlikely to be
+392 88 62-0658 fully reversed. We see EUR-USD at 1.10-1.12 by the end of our forecast horizon.
roberto.mialich@unicredit.eu
■ A lower USD will likely help GBP-USD extend its recovery somewhat above 1.20. USD-
JPY is set to further decline below 135. We see this happening along with USD-CNY falling
below 7.00 on signs that domestic demand in China gains momentum. We remain bearish
on the CEE3 currencies, the TRY and the RUB.
2022 has been the year of the 2022 has been the year of the USD, with the dollar index (DXY) up over 10% YTD even after
USD, given rising interest rates
in the US, ongoing global risk the slump that followed the publication of US CPI inflation data for October. Chart 1 shows how
aversion and high volatility sensitive the greenback has been to the US long-term yields dynamics. The USD also benefited
from its role of preferred safe-haven currency following the outbreak of the Ukraine conflict in
February (Chart 2) and the consequent sharp rise in FX market volatility. This is evident in Chart
3, showing the DXY against its 3M implied volatility, which we calculate as an average of the 3M
implied volatility levels of the six G10 currencies included in the DXY basket (EUR, JPY, CHF,
GBP, CAD and SEK) weighted according to their proportions in the index. US interest rates,
global risk sentiment and volatility are set to continue to play a key role in the global FX outlook
and the USD’s dynamics in 2023 and 2024.
A less buoyant USD ahead, but The strong dependence of the USD strength on the rise in US yields means that the greenback
not a complete trend reversal
will be forced to loosen its grip as US yields fall again, as already occurred on the back of the
latest US CPI inflation data. We expect the Fed to end its tightening cycle at 5.00% in 1Q23 and
start an easing cycle down to 3.50% in 2024. This is set to worsen the USD outlook, but a total
reversal of the USD strength, bringing the dollar index (DXY) back to mid-2021 levels of around
90, when EUR-USD was trading mostly above 1.20, remains unlikely. We see the DXY ending
2023 at around 103 and 2024 at just below 100. We expect the global economic picture and risk
sentiment to remain bearish at least early in 2023, probably putting a brake on the recent sell-off
and allowing the USD to recover some ground. Moreover, even if the Fed ends tightening and
starts cutting rates, rate differentials between the US and the rest of the world are likely to offer
the USD sufficient cushion to the downside. The idea that the Fed will end rate hikes and begin
an easing cycle is also likely to raise market expectations that other major central banks will
follow suit, reducing the room for a USD sell-off.
CHART 1: THE DOLLAR INDEX (DXY) HAS BEEN LARGELY CHART 2: …WHILE LINGERING GLOBAL RISK AVERSION HAS
DRIVEN BY US YIELDS THIS YEAR... BOOSTED THE USD AS A SAFE-HAVEN CURRENCY…
120 4.50 825

117
DXY US 10Y yield (rs)
4.00 DXY MSCI World (rs)
115 113 775
3.50
110 109
725
3.00
105 105
2.50 675
101
100
2.00
97
625
95
1.50
93
90 1.00 575
89
85 0.50
85 525
May-21 Aug-21 Nov-21 Feb-22 May-22 Aug-22 Nov-22
May-21 Aug-21 Nov-21 Feb-22 May-22 Aug-22 Nov-22

FX volatility is unlikely to fall We do not expect volatility to fall sharply. Large swings, even on an intraday basis, have
sharply
become much more frequent in the FX market this year, primarily after the summer, as shown in
Chart 4, in which the daily high and the low levels of the DXY are plotted, revealing a large
widening of the difference between the two in 2H22.
CHART 3: …BUT THE GREENBACK HAS ALSO BEEN CHART 4: CURRENCY FLUCTUATIONS HAVE INCREASED
SENSITIVE TO SWINGS IN FX IMPLIED VOLATILITY SHARPLY ON AN INTRADAY BASIS
115 15 3.50
DXY DXY 3M implied volatility (rs) DXY - difference between daily high and low levels
112 14
3.00
109 13
106 12 2.50
103 11 2.00
100 10
1.50
97 9
94 8 1.00
91 7
0.50
88 6
85 5 0.00
May-21 Aug-21 Nov-21 Feb-22 May-22 Aug-22 Nov-22 May-21 Aug-21 Nov-21 Feb-22 May-22 Aug-22 Nov-22
EUR-USD to remain at around Yield differentials between the eurozone and the US have proved an important driver for EUR-
parity in early 2023 and climb
back up to 1.10-1.12 over the USD this year (Chart 5), and we expect them to continue to do so in the future. The ECB is set
coming quarters to end tightening at 2.75% in 1Q23 and to start cutting rates only in 2H24, and probably at a
slower pace than the Fed. The recent EUR-USD rally – from below parity to over 1.04 in just four
trading sessions – has probably been an overshooting. Considering global risks and the sluggish
economic picture we see for the eurozone, we expect EUR-USD to return and steady back close
to parity at the start of 2023 and climb back up to 1.10-1.12 over the coming quarters, thus
reaching its long-term equilibrium value we estimate at around 1.11 (see the Appendix at the
end of this section). In any case, the latest price action suggests that EUR-USD has probably
made enough base building to avoid a new heavy drop after the low of 0.9537 that was reached
this year. Data on market exposure also reveal that the EUR-USD rebound since the end of
August was led by asset managers, which increased their net long exposure, thereby offering
the euro additional tailwinds (Chart 6).
CHART 5: EUR-USD REMAINS SENSITIVE TO EU VS. US CHART 6: ASSET MANAGERS’ PURCHASES OFFERED THE
INTEREST-RATE DIFFERENTIALS EUR-USD SOME FLOOR BELOW PARITY IN AUGUST
-1.30 1.20 450 1.30

EU-US 10Y rate differentials EUR-USD (rs)
-1.40 1.18 EUR-USD net-long exposure - asset managers (k) EUR-USD (rs)
400 1.25
-1.50 1.15
1.13 1.20
-1.60 350
1.10
-1.70 1.15
1.08 300
-1.80
1.05 1.10
-1.90 250
1.03
1.05
-2.00 1.00
200 1.00
-2.10 0.98
-2.20 0.95 150 0.95

Dec-21 Feb-22 Apr-22 May-22 Jul-22 Aug-22 Oct-22 Nov-22 Jan-21 Apr-21 Jul-21 Oct-21 Jan-22 May-22 Aug-22 Nov-22

USD-JPY has room to further Until now, the JPY fluctuations (-18% YTD against the USD and -9.5% against the EUR)
extend its fall below 135
occurred mostly alongside the CNY, particularly after the summer (Chart 7). Recent BoJ
intervention (worth over USD 40bn, nearly 4% of Japan’s total FX reserves) signals that
Japanese policymakers are not indifferent to the JPY depreciation especially after USD-JPY
exceeded key thresholds such as 150. The pair reversed course in October on unconfirmed BoJ
intervention after hitting an over-20Y high of 151.94. Yet, the strong market reaction to US
October CPI inflation has already dragged USD-JPY back to around the 140 baseline. A further
reduction in the USD strength over the coming quarters can put a lid on a new USD-JPY rally
but yield spreads between the US and Japan will probably remain a brake on a further large
downward correction in USD-JPY well below 135. The extent of the additional fall of this pair will
likely also depend on the BoJ’s monetary policy intentions. The BoJ has strongly opposed policy
normalization until now, remaining the only G10 central bank with a negative policy rate (at -
0.10%). Yet, CPI inflation has risen to 3.0% yoy in September, making the BoJ’s current stance
more difficult to hold. Maintaining the zero target on the JGB 10Y yield has also become
complicated. The BoJ was forced to announce extraordinary auctions to keep the 10Y JGB yield
within the 0.25% margin, while the 10Y Japanese swap rate is already exceeding 0.50% (Chart
8). The BoJ is confident that inflationary pressure will cool down over time even though the
Japanese government has announced an extra budget of JPY 29tn for stimulus. The BoJ might
be satisfied with the recent USD-JPY drop from October’s highs (-8%) also as a means of
containing inflation at home. The unexpected drop of the Japanese GDP in 3Q22 (-0.3% qoq)
reinforced the need of an accommodative monetary policy. Still, the new BoJ governor, who is
set to take over from Haruhiko Kuroda in April 2023, could be tempted to adjust monetary policy.
Bringing the policy rate back to zero and adjusting the reference target for 10Y JGB’s
accordingly is not our baseline but remains a key risk in our 2Y forecasting horizon. Position
unwinding is likely to be more intense if the BoJ goes back to zero, accelerating the USD-JPY
retreat towards 130 and potentially even below.
GBP-USD set to regain and The GBP picture has already improved from the plunge that occurred in September when
exceed the 1.20 handle
GBP-USD tumbled to a new record low of 1.0382 and EUR-GBP jumped to over 0.92 (Chart
9). Rishi Sunak becoming UK prime minister and the confirmation of Jeremy Hunt as
chancellor of exchequer restored some confidence in UK assets, including the currency. The
3M implied volatility on GBP-USD has already dropped back to pre-crisis levels around 12%
after a spike to 20% and the 3M risk reversal rate, although remaining in favor of GBP put
strategies, has already become less negative (Chart 10). We expect GBP-USD to recover
further in the less buoyant scenario we envisage for the greenback over the next two years.
CHART 7: JPY MOVEMENTS AGAINST THE USD HAVE CHART 8: THE 10Y JAPANESE SWAP RATE IS STILL WELL
OCCURRED ALONG WITH THE USD-CNY DYNAMICS ABOVE THE 0.25% LIMIT THE BOJ EXERTS ON 10Y JGB
154 7.50
0.75
USD-JPY USD-CNY (rs)
150
Japan 10Y swap rate JGB 10Y
146 7.30
0.63
142
7.10
138 0.50
134
6.90
130 0.38
BoJ's cap at 0.25%
126
6.70
0.25
122
118 6.50
0.13
114
110 6.30
Dec-21 Feb-22 Apr-22 Jun-22 Aug-22 Oct-22 Nov-22 0.00
Dec-21 Feb-22 Mar-22 May-22 Jun-22 Aug-22 Sep-22 Nov-22

However, we see at least two major obstacles that might reduce the pace of the GBP
rebound: 1. a much heavier deterioration in the British economy and consequently 2. the BoE
refraining from aggressive rate hikes. The UK future curve has already scaled back interest
rate expectations and is now pricing in a peak just above 4.50% by September 2023.
However, we expect the BoE to hike even less to 4.00% in December and to start cutting
rates from 2Q24 down to 3.25%, a picture that will likely make it difficult for GBP-USD to rise
much beyond 1.23 in the next two years. EUR-GBP might re-approach 0.90 due to cross-
adjustments and probably a weaker growth outlook for the UK than for the eurozone.
We see EUR-CHF steadying Investors were caught off guard by the SNB’s decision to start normalization in mid-June
back above parity
(before the ECB) and to continue in September, bringing its policy rate to 0.50%. However,
EUR-CHF managed to hold the line, containing the sell-off at just below 0.94 (a low of 0.9369
was reached in early August) and recovering back to around parity after the ECB started
normalization in July. Tightening is set to continue in Switzerland, even though CPI inflation
has already started dropping. However, the SNB is set to keep its policy rate below the ECB
deposit rate for the remainder of its rate hike cycle, which we expect to end at 1.25% vs. the
ECB deposit rate peaking at 2.75%. This prospect will likely help EUR-CHF climb above parity
and then progressively rise towards the upper-end of the 1.00-1.05 band.
G10 high-betas: more volatility Volatility rather than full-fledged trends will likely remain the theme for high-beta units in the G10
than trends, again
camp, i.e., the AUD, the NZD, the CAD and the two Nordics. This group of currencies might
receive some support from a less-buoyant USD and potentially from a firmer Chinese economy,
primarily in the case of the AUD and the NZD, but other factors no longer appear supportive.
Several countries are set to enter a recession; lingering global risk aversion is unlikely to help
either; more rate hikes by the respective central banks are well priced in by the respective
forward curves and risks remain that tightening might progressively slow if anything. After all, the
BoC already surprised markets with a 50bp rate move in October, raising in turn expectations
that other central banks might reduce the pace of their rate hikes. On balance, we see AUD-
USD back towards 0.75; NZD-USD back toward 0.70 and USD-CAD just below 1.25 over a two
year horizon. The picture is not that different for the two Nordics. Both the SEK and the NOK
have room to strengthen against the EUR given their undervaluation, as we show in our
Appendix below, but their respective central banks are unlikely to offer great help in the future. In
our view, the Norges Bank can lift its policy rate up to 3.00% by 1Q23 and cut to 2.50% by the
end of 2024. The Riksbank, on the other hand, is set to hike up to 2.25% by 1Q23, but will likely
bring back rates to 1.75% in 2024. On balance, we see EUR-NOK and EUR-SEK below 9.90
and 10.50, respectively, at the end of our two-year forecasting horizon.
CHART 9: STERLING HAS ALREADY ABSORBED THE IMPACT CHART 10: OPTION MARKET INDICES POINT TO A SOMEWHAT
OF THE RECENT UK POLITICAL CRISIS ROSIER PICTURE FOR STERLING
0.94 1.00 20
1.39 GBP-USD 3M risk revesal rate
EUR-GBP GBP-USD (rs)
0.92 1.35 GBP-USD 3M implied volatility (rs) 18
0.00
1.31 15
0.90
1.27 -1.00
13
0.88
1.23
-2.00 10
0.86 1.19
8
1.15 -3.00
0.84
5
1.11
-4.00
0.82 3
1.07
0.80 1.03 -5.00 0

Dec-21 Feb-22 Apr-22 May-22 Jul-22 Aug-22 Oct-22 Nov-22 Dec-21 Feb-22 Apr-22 Jun-22 Aug-22 Oct-22 Nov-22

Bearish picture ahead for CEE3 We expect a bearish picture for the CEE3 currencies (the PLN, the HUF and the CZK), the
currencies, the TRY and the
RUB TRY and the RUB throughout our two-year forecast horizon. Despite economic growth in the
respective countries being likely to slow in 2023 and accelerate in 2024, this will also depend
on an effective recovery in the eurozone (for the CEE3 currencies), financial risks being
addressed (in Turkey) and improving import substitution (in Russia). Against this backdrop,
we expect the respective central banks to limit additional monetary tightening despite the
strong inflation momentum at home. The CNB, the NBP, the CBRT and the CBR have already
signaled that they will remain on hold into 1H23. We expect all these currencies to depreciate
due to terms-of-trade shocks and FDI and EU funds inflows being insufficient to cover the
large current account deficits. Additional open-market interventions by these central banks are
again likely to play a key role in containing the margin of depreciation for these currencies.
The NBP, in particular, looks to be one of the most efficient central banks when it comes to
fighting their own currency depreciation. The CNB, on the other hand, has to reduce its FX
reserves faster than its peers if it wants to prevent further CZK depreciation, while the NBH’s
FX reserves are too low and the central bank might thus be forced to tighten further to defend
the HUF, if needed. Over our 2Y forecasting horizon, we expect the PLN to drop to 4.80-4.85
against the EUR; the HUF to slide to 425-430 and the CZK to return beyond 25.00. The RUB
is likely to exceed 100 against the USD by the end of 2024, with the CBR possibly letting the
RUB depreciate to account for external shocks and cutting rates to 6.5% if Russian inflation
returns to the 4% target by 2024. We expect the TRY to slide beyond 20.00 against the USD,
although we see no scope for the CBRT to ease in 2023. The CBRT, on the other hand, can
tighten aggressively if the opposition wins 2023 elections, to be held no later than 18 June,
which represents the key event in Turkey next year.
The PBoC will allow a slide of The CNY hit a new record low of 7.3270 against the USD on 1 November (with the CNH even
USD-CNY below 7.00 only if the
Chinese economy is effectively slipping down to 7.3747 in late October) and its fall strongly reflected Beijing’s attempts to
bottoming out spur external demand given that domestic demand remains weak. Both private investments
and consumer spending in China have been hit by severe COVID-19 restrictions and the
persistent real-estate crisis. Beijing’s attempts to keep its own currency weak are also favored
by the still low inflation pressure (CPI inflation slumped to 2.1% yoy in October from 2.8% yoy
in September, while PPI slipped into negative territory with a 1.3% yoy fall last month). This is
why the PBoC has maintained a relatively accommodative monetary policy stance until now,
having cut its 1Y and 5Y policy rates over the course of this year to 3.65% and 4.30%,
respectively. The CNY’s ability to recover thus seems to remain strongly linked to capacity of
the Chinese economy to rebound and domestic demand in particular to gain momentum over
the next few quarters. For this reason, we think that the USD-CNY fall back close to 7.00
following the recent USD sell-off, easing of COVID-19 restrictions in China and the new plan
announced by the Chinese government to help the real-estate sector, has occurred too
quickly. Beijing still needs a very competitive currency; therefore, we would not be surprised if
the PBoC were to progressively drive USD-CNY back to the 7.15-7.20 area early in 2023. A
fall below 7.00 remains a medium-term target (we see the pair at 6.90 by the end of 2024)
that is strongly dependent on evidence that domestic demand in China has gained
momentum. Meanwhile, geopolitical risks directly involving Beijing, such as tensions with
Taiwan, might represent a lingering burden on the Chinese currency.

Appendix – FX BEER model updated

Elia Lattuga We have updated our FX fair-value model, BEER by UniCredit9, with the text and the table
Cross Asset Strategist
Deputy Head of Strategy Research below showing our newly calculated long-term equilibrium levels. Using a confidence
(UniCredit Bank London) threshold of +/-5% with respect to fair values, we estimate the following:
+44 207 826-1642
mailto:elia.lattuga@unicredit.
euelia.lattuga@unicredit.eu ■ EUR: EUR-USD remains somewhat undervalued even after rebounding back above parity.
We estimate its equilibrium level at just above 1.10 at present.
Roberto Mialich
FX Strategist ■ GBP: Sterling remains considerably undervalued despite its recovery from the record lows
(UniCredit Bank, Milan) reached in September. We calculate a fair value of around 1.40 for GBP-USD and still
+392 88 62-0658
roberto.mialich@unicredit.eu below 0.80 for EUR-GBP.
■ JPY and CHF: USD-JPY remains sharply overvalued, despite the recent sell-off from
above 150. Its fair level remains close to 100 in our calculations. On the other hand, EUR-
CHF remains undervalued, as long-term fundamentals suggest it should be around 1.10.
■ AUD, NZD and CAD: Commodity currencies remain quite undervalued too, with the AUD
showing the largest undervaluation of the three. We estimate the equilibrium levels of
AUD-USD, NZD-USD and USD-CAD at around 0.89, 0.69 and below 1.20, respectively.
■ NOK and SEK: The structural undervaluation of the two Nordics has not significantly
diminished and the NOK, in particular, remains the most undervalued currency in G10
against both the USD and the EUR. We calculate fair values for EUR-NOK and EUR-SEK
at around 6.00 and 9.20, respectively.
FAIR VALUATION OF G10 CURRENCIES ACCORDING TO BEER BY UNICREDIT
Current BEER by UniCredit Misalignment undervalued* fairly valued* overvalued*

EUR
EUR-USD 1.04 1.11 -6.4% EUR-USD
EUR-CHF 0.98 1.10 -10.8% EUR-CHF
EUR-GBP 0.88 0.79 10.4% EUR-GBP
EUR-JPY 145 132 9.7% EUR-JPY
EUR-NOK 10.37 6.01 72.6% EUR-NOK
EUR-SEK 10.86 9.22 17.8% EUR-SEK
EUR-AUD 1.54 1.26 22.5% EUR-AUD
EUR-NZD 1.69 1.62 4.0% EUR-NZD
EUR-CAD 1.38 1.32 4.9% EUR-CAD
USD
USD-CHF 0.94 0.99 -4.7% USD-CHF
GBP-USD 1.19 1.402 -15.2% GBP-USD
USD-JPY 139.25 118.8 17.2% USD-JPY
USD-NOK 9.96 5.40 84.5% USD-NOK
USD-SEK 10.44 8.29 25.9% USD-SEK
AUD-USD 0.68 0.89 -23.6% AUD-USD
NZD-USD 0.62 0.69 -10.0% NZD-USD
USD-CAD 1.33 1.19 12.1% USD-CAD
USTWAFE Index (1) 119.71 105.4 13.6% USTWAFE Index
*with respect to a threshold of +/- 5% Source: Bloomberg, UniCredit Research
(1) the USTWAFE is the US Fed trade weighted nominal advance foreign economies dollar index
9 The original version of our BEER model can be found in UniCredit Global Themes – Introducing BEER by UniCredit, 3 September 2013.

Equity Strategy
2023 – a year of transition to a more-stable upward trend
Christian Stocker, CEFA, ■ Following a volatile sideways movement in the first few months of the year, European equities
Lead Equity Strategist
(UniCredit Bank, Munich) have potential to rise by about 10% in 2023, mainly in the second half. This is likely to be
+49 89 378 18603 primarily supported by valuation expansion, while earnings are unlikely to grow until 2024.
christian.stocker@unicredit.de
■ We recommend starting the year with a defensive allocation, while cyclical sectors should
become attractive versus defensives over the course of 2023 due to low valuations, relief
on the cost side and increasing global economic activity.
We expect stock markets to The stock market environment should brighten over the first half of 2023, with an increasingly
rise by about 10% in 2023
supportive foundation in the second half of the year; investors anticipate central banks to start
cutting rates in early 2024 and economic growth to start to recover. In early 2023, we expect
to see a continuation of volatility while the lows of autumn 2022 should mark a solid bottom;
we do not expect there to be a renewed test of these levels. We expect company earnings to
resume an upward trajectory in 2H23 after a temporary slowdown in the first half of 2023.
Over the course of the year, supportive effects should come from gradually declining energy
prices and easing supply-chain bottlenecks. However, earnings growth of European
companies should be limited and close to flat levels in 2023 on a yearly basis. In 2024, as
economic growth starts to accelerate (while remaining below potential), earnings growth
should recover to single-digit rates of about 5% in both Europe and the US. The transition of
central banks from rate hikes to stable rates, and, towards the beginning of 2024, lower rates,
should support stock market valuations. This will be an important driver of a positive trend in
stock markets in the second half of 2023. Although the environment should brighten up
somewhat compared to 2022, not all burdening factors – such as elevated energy prices and
geopolitical tensions – are likely to have abated by then. However, 2023 will likely be a year of
transition and stabilization, and this will have a positive impact on stock markets. Our 2023
year-end European stock market targets are about 10% above current levels, while our target
for the US shows potential that is somewhat lower, about 8%. We do not expect previous
index highs reached at the end of 2021 to be reached before 2024.
Our 2023 year-end index targets are as follows: STOXX Europe 600 470, Euro STOXX 50
4200, DAX 15500, MSCI Italy 69 and S&P 500 4300 index points.
Into 2023, we recommend starting with a mixed allocation with an overweight position in
Automobiles & Parts, Food & Beverage, Health Care, Technology and Insurance. Over the
course of the year, we expect cyclical sectors to gain broader appeal.
CHART 1: EUROZONE MANUFACTURING PMI AND CHART 2: EUROZONE GDP GROWTH AND GROWTH OF
STOXX EUROPE 600 12M FORWARD EPS STOXX EUROPE 600 EARNINGS ESTIMATES
70 40% 15 30
Dec 2023
65 30%
10 20
60 20%
5 10
55 10%
0 0
50 0%
-5 -10
45 -10%
40 -20% -10 -20
35 -30% Eurozone GDP growth, in % yoy

Eurozone manufacturing PMI -15 -30
Eurozone GDP growth estimates, in % yoy
STOXX Europe 600, 12M fwd. EPS yoy in % (rs) UCG estimates
30 -40% 12M fwd. EPS estimates, in % yoy (rs)
2006 2008 2010 2012 2014 2016 2018 2020 2022 -20 -40
2008 2010 2012 2014 2016 2018 2020 2022 2024
Source: Bloomberg, S&P Global, UniCredit Research

Earnings growth is expected to Our index earnings forecasts are based on our eurozone GDP growth estimates of zero
slow from double-digit levels in
2022 to being only flat in 2023 growth in 2023 and of 1% in 2024. These forecasts are significantly below trend. Based on
these assumptions, we expect European company earnings to show zero growth in 2023 after
experiencing a temporary decline in the first half of the year. Company earnings will turn
positive again in 2024, albeit with modest growth of 3.5%. Table 1 shows a comparison of our
earnings-growth assumptions and consensus numbers for 2023 and 2024. The table shows
that we expect lower earnings growth than consensus. As demand and economic growth risks
are skewed to the downside, we think consensus expectations are still too positive and will
likely be revised down. Chart 3 shows the expected path of 12M forward earnings estimates,
which, at the end of 2023, are arithmetically the same as earnings estimates for 2024. By mid-
2023, 12M forward EPS figures are likely to be 5% lower than current levels, while a
moderate increase of 3.5% compared to current levels should be possible by the end of 2023.
TABLE 1: GROWTH OF EARNINGS ESTIMATES CHART 3: YEAR-END 2023 EXPECTED 12M FORWARD EPS AND
(CONSENSUS AND UNICREDIT RESEARCH) P/E RATIO (JAN 2022=100)
130
Consensus UniCredit STOXX Europe 600: UCG EPS estimates
2023E 2024E 2023E 2024E S&P 500: consensus EPS estimates
120
Growth of EPS estimates, yoy (%)
110
Euro STOXX 50 2.0 6.7 0.0 3.5
STOXX Europe 600 2.1 5.9 0.0 3.5 100
DAX 4.2 9.7 1.5 5.5 90

S&P 500 5.6 9.4 n.a. n.a.
80
Earnings level compared to end-2021 = 100 70
Euro STOXX 50 124 132 122 126 60

STOXX Europe 600, 12M fwd. EPS S&P 500, 12M fwd. EPS
STOXX Europe 600 120 127 118 122 STOXX Europe 600 P/E ratio S&P 500 P/E ratio
50
DAX 110 120 107 113 Jan 22 May 22 Sep 22 Jan 23 May 23 Sep 23
S&P 500 114 125 n.a. n.a.
Source: Bloomberg, Refinitiv Datastream, UniCredit Research
Valuations are likely to recover The P/E ratios of major stock markets have declined by about 25% since the start of 2022
somewhat in Europe and to
remain broadly stable in the US (Chart 3). This has not only been due to a strong increase in economic and geopolitical
uncertainty but also to a significant increase in central bank rates and bond yields. In a long-
term comparison, current P/E ratios can be described as very favorable (Chart 4). This is
particularly true for Europe, with a discount of more than 10% to the long-term average, while
the P/E ratio of the S&P 500 is less attractive – it is trading 10% above its long-term average.
Valuation recovery will be supported by bond yields gradually falling from recent peaks. This
is particularly true for stock markets with cheap valuations, such as in Europe. Against this
backdrop, we expect the P/E ratio of the STOXX Europe 600 to recover by about 10% in
2023, while the valuation of the S&P 500 should initially remain broadly unchanged as an
increase above average valuations is unlikely due to uncertainties resulting from the Fed’s
strong monetary tightening. Our 2023 P/E target level for the Euro STOXX 50 is 11.5 (up from
10.7) and a broadly unchanged 17 for the S&P 500. However, as Fed rate-cut expectations
will rise in the second half of 2023, there is some upside risk to the US valuations, primarily
driven by technology stocks.
Margin pressure, but starting So far, profit margins have been resilient because companies have been able to pass on a
from a very high level
large share of higher input costs to their customers. However, central banks’ efforts to reduce
inflation are highly likely to result in some demand compression, so that, in combination with
ongoing high input costs and wage increases, profit margins will come under pressure. This
will have negative effects on earnings growth, which is also reflected in our subdued
estimates for 2023-24. However, profit margins are at historically high levels (Chart 5), and in
our scenario of a mild recession over the winter, we do not expect them to fall much below
average values of recent years. This limited pressure on margins should not be a major
burden for stock markets and is essentially already anticipated in currently cheap valuations.

CHART 4: STOXX EUROPE 600 AND S&P 500 – P/E RATIO AND CHART 5: PROFIT MARGINS (IN %) OF STOXX EUROPE 600 AND
LONG-TERM AVERAGE S&P 500 COMPANIES
25 14
S&P 500 12M fwd. P/E STOXX Europe 600
STOXX Europe 600 12M fwd. P/E S&P 500
S&P 500 P/E period average 12
STOXX Europe 600 P/E period average
20
10
15 8
6
10
4
Year-end 2022
5
2006 2009 2012 2015 2018 2021 2
2005 2008 2011 2014 2017 2020
Gradually declining volatility in Volatility is set to remain high going into 2023. Central banks’ swift and strong monetary
2023
tightening is unlikely to go without consequences and represents a source of continued-high
uncertainty. Another critical point is the European energy crisis, with natural gas prices likely
to remain high for some time. With the expected end to interest-rate hikes in the first quarter,
gradually falling energy prices by mid-2023 and a stabilization of the economy, visibility
should increase again. When it does, the result should be positive stock market momentum
again. Thus, we do not expect to see the start of a more-stable upward trend in stock markets
in the first quarter. Rather, equities are likely to remain trapped in a broadly sideways range.
This is also reflected in our mid-year 2023 index targets, which largely anticipate a sideways
movement compared to current levels (see also risky-asset table on page 63). We think, a
more-stable upward trend in stock markets can only be expected in the second half of the
year, with investors increasingly focusing on a brighter trend in 2024, based on financial
conditions improving again with central bank rate cuts and the expected stabilization of
economic growth (which we nevertheless still expect to be below trend). This means that in
full-year 2023 most upward performance is likely to occur in the second half of the year.
We think that, at least in the first quarter of 2023 as long as the risk factors mentioned above
Starting with a mixed sector
allocation, the cyclical share prevail, a broadly non-cyclical-sector allocation is appropriate. We recommend overweight
should increase during 2023 positions in Automobiles & Parts, Food & Beverage, Health Care, Technology and Insurance.
While Food & Beverage and Health Care are strongly defensive sectors with fairly stable margins
and earnings growth, Automobiles & Parts is notable with its historically low P/E ratio of 5.3,
leaving European carmakers trading at an almost 60% discount to the overall market. This is well
below the 40% discount average since 2011. As a growth sector, Technology should benefit from
bond yields having peaked, which is supportive of valuations in the sector. At the same time,
Technology has the highest profit margins in Europe. We expect to see only a below-average
decline in margins, as the European Technology sector is not very dependent on private demand
but is more industry-oriented, with longer-term contracts. The Insurance sector is expected to
benefit from both increasing pricing and recovering volumes, and, above all, higher yield levels
compared to the last few years have also contributed to making new investments more profitable.
However, as the first half of 2023 progresses, more-cyclical exposure may be warranted.
Chart 6 shows that the S&P Global eurozone manufacturing PMI is, with a lead of about three
months, a reasonable predictor of the relative earnings growth of cyclicals versus defensives.
This means, in an environment of stabilizing economic indicators, which is to be expected in
1H23, earnings growth will become attractive in cyclical sectors versus defensives – and this
again should support the relative performance of cyclicals. This is all the more likely as
defensives have a very high valuation compared to cyclicals (Chart 7). We think that, in an
environment of gradually normalizing economic and financial conditions over the next two
years, the valuation gap should close in favor of cyclicals.

CHART 6: MANUFACTURING PMI AND EARNINGS GROWTH CHART 7: P/E VALUATION OF CYCLICALS AND DEFENSIVES
OF CYCLICALS MINUS DEFENSIVES
75 100 6
Eurozone manufacturing PMI, 3M lead Relative P/E ratio cyclicals minus defensives
Earnings growth (12M fwd. EPS, in % yoy): cyclicals minus defensives (rs)
70 80 Period average
4
65 60
60 40 2
55 20
0
50 0
45 -20 -2
PMI with
turnaround
40 in 2023 -40
-4
35 -60
30 -80
2008 2010 2012 2014 2016 2018 2020 2022 -6
2011 2013 2015 2017 2019 2021
Source: Bloomberg, S&P Global, UniCredit Research
European stocks have some Purely based on current data, European stock markets looks more attractive than US
advantages over US
counterparts counterparts. With a P/E ratio of 11.9 compared to 17.3 for the S&P 500, the STOXX Europe
600 has significantly lower valuations, while its 12M forward earnings estimates are
outperforming those of the S&P 500 (Chart 8). This is particularly important, as high interest
rates compared to the past create support to value stocks such as financials. The high weight
of value stocks such as financials gives an advantage to the European stock market. Its 30%
discount to US stock markets is the widest it has been since 2005. This high valuation
discount makes Europe less vulnerable than the US when it comes to potential earnings
disappointments or downward revisions over the next few months in an environment that is
expected to feature a significant slowdown in economic growth.
European earnings yield looks A comparison of earnings yield and money-market returns also shows the advantage the
attractive compared to cash
yield European stock market has over the US stock market. The yield on STOXX Europe 600
company earnings is about 6% more than cash (6M Euribor), compared to just 0.7% for the S&P
500 (based on the 6M Libor; Chart 9). Overall, more-attractive earnings growth, valuations and
earnings yield might not imply a rally by European stocks as long as bond yields remain at their
currently high levels and as long as the correlation between stocks and bonds is in deeply
positive territory. However, over the past six months, the Euro STOXX 50 has shown
significantly better performance (of +6%) than the S&P 500 (-1%). The more-favorable data for
Europe suggest that this outperformance may continue in the coming months.
CHART 8: RELATIVE EARNINGS AND PERFORMANCE OF CHART 9: EUROPEAN AND US EARNINGS YIELD COMPARED
STOXX EUROPE 600 AND S&P 500 TO CASH YIELDS
0.2 12
STOXX Europe 600 earnings yield minus 6M Euribor
S&P 500 earnings yield minus 6M Libor
0.18 10
0.16 8
0.14 6
0.12 4
0.1
12M fwd. EPS STOXX Europe 600 versus S&P 500 2
Relative performance STOXX Europe 600 versus S&P 500
0.08
2016 2017 2018 2019 2020 2021 2022 0
2006 2008 2010 2012 2014 2016 2018 2020 2022

Risks to our constructive 2023 Low valuations and increased volatility are always indicative of numerous risks. This is
index-price targets
particularly true for 2023. As earnings growth is expected to be fairly subdued in 2023, the
potential for equity markets comes mainly from valuation expansion. As valuations mirror still-
fragile investor sentiment, there is above-average uncertainty about 2023 performance
potential. Aside from the fact that several current sources of geopolitical risk have the
potential to turn into global conflicts, and alongside ongoing high and potentially further rising
(energy) prices, the most important factor is that central banks’ swift and strong monetary
tightening is slowing the economy (and therefore the earnings development of companies)
more strongly than desired. Liquidity drying up is an important risk factor for stock markets. It
is hard to say if or when these risks will materialize. We therefore recommend focusing on
markets and sectors with cheap valuations and solid margins.

Credit Strategy
Non-Financials: favoring lower capital tiers and HY
Dr. Stefan Kolek ■ We expect spreads in the iBoxx Non-Financials index to trade sideways in 1H23 and to
Credit Strategist – Non-financials
(UniCredit Bank, Munich) tighten in 2H23, with those in the Investment-Grade Senior, Hybrid and High-Yield indices
+49 89 378-12495 reaching 65bp, 250bp and 350bp, respectively, by the end of 2023.
stefan.kolek@unicredit.de
■ We recommend entering the new year with a defensive allocation, focusing on non-cyclical
sectors and sectors less exposed to funding risk and energy costs. We recommend
switching to a more-cyclical allocation only later in the year. We are keeping our
overweight recommendation on Health Care and Telecoms and our underweight
recommendation on Industrials, Chemicals, Travel & Leisure, Retail and Utilities.
We expect corporate-credit Signs that the expected recession is likely to remain only technical, that inflation will start to
spreads to tighten in 2H23 after
moving rangebound in 1H23 decline from its peak along with cheaper valuations should support European NFI credit in
2023. We expect average spreads for the iBoxx IG NFI Senior, Hybrids and HY NFI indices to
trade sideways in 1H23 and to tighten to 65bp (currently 85bp), to 250bp (currently 293bp)
and 350bp (currently 417bp), respectively, by the end of 2023. As such, we expect HY and
subordinated debt to outperform, generating 11% and 9% respectively in total-return terms,
vs. the 6% we expect to be generated by IG NFI senior bonds.
Carry in corporate credit looks We think that the current economic downturn is largely priced into European corporate credit and
appealing
that risk free yields are close to a peak. In this environment, we believe that European corporate
credit will benefit from its high carry – the average yield in the iBoxx Non-Financial Senior index is at
3.6%, while average yields among subordinated and high-yield debt are at 5.7% and 7.5%
respectively – which will be the key source of expected total return next year.
Credit-metric deterioration will The above-mentioned factors should outweigh the impact of deteriorating corporate credit
be gradual and manageable
quality. Amid high energy costs and weaker demand, profitability will decline, and lower
EBITDA will lead to an increase in leverage. However, leverage deterioration among
European non-financials should be gradual and contained, as corporates stick to conservative
financial policies, leading to still-growing cash positions and delayed capital spending amid
limited visibility. The burden of interest costs is rising rapidly (Chart 2) but should remain
manageable. It is expected to start declining later in 2023. Nonetheless, credit-rating
momentum is expected to weaken, notably in energy-intensive sectors (Chemicals,
Industrials), as energy-cost-hedging contracts are renewed amid higher costs, while cyclical
sectors are expected to also suffer from faltering consumer and investment demand.
CHART 1: IBOXX NFI SEN VS. FAIR VALUE CHART 2: NFI DEPOSITS VS. INTEREST PAID
Residual NFI IG Sen. Fitted Forecast Non-financials' deposits Interest paid by non-financials
40%
300
30%
250
20%
200
10%
150
yoy change
0%
bp
100
50 -10%
0 -20%
-50 -30%
-100 -40%
Dec-18
Mar-06
Dec-06
Dec-09
Dec-12
Dec-15
Dec-21
Sep-07
Jun-08
Mar-09
Sep-10
Jun-11
Mar-12
Sep-13
Jun-14
Mar-15
Sep-16
Jun-17
Mar-18
Sep-19
Jun-20
Mar-21
Sep-22
Jun-23
-50%
1Q00
1Q01
1Q02
1Q03
1Q04
1Q05
1Q06
1Q07
1Q08
1Q09
1Q10
1Q11
1Q12
1Q13
1Q14
1Q15
1Q16
1Q17
1Q18
1Q19
1Q20
1Q21
1Q22
*Our credit macro model is based on an ordinary-least-squares (OLS) regression of spread changes on quarterly real GDP growth, Euro STOXX 50 returns and the slope of the Bund curve. Source: IHS Markit, Haver,
UniCredit Research

We expect to see EUR 10-15bn As such, we expect to see a rise in fallen angels and a decline in rising stars. We expect to see EUR
of fallen angels and up to EUR
5bn of rising stars in 2023 10-15bn of fallen angels next year, mainly in the Retail, Chemicals, Industrials and Travel & Leisure. At
the same time, scope for issuers moving from the iBoxx High-Yield index into the iBoxx Investment-
Grade index is expected to be limited; we expect to see up to EUR 5bn of rising stars (EUR 13bn
YTD), mainly in Energy and Health Care. These volumes are low relative to the outstanding volume of
each of these sectors and should be technically neutral for their respective indices. Amid banks’
tightening lending policies and amid rising energy and funding costs in our base-case scenario, we
expect default rates to increase gradually and to reach 4% by the end of 2023 (Chart 3).
New bond supply is expected Supply-wise, we expect to see EUR 170-190bn of gross issuance in senior IG paper from NFIs in
to stay moderate, being
technically neutral-to- 2023 – the EUR 167bn worth issued YTD is close to our full-year forecast of EUR 180bn – and around
supportive a third of this is expected to be environmental, social and governance (ESG) paper (vs. 28% YTD).
Given EUR 150bn of redemptions, we expect net supply to be at EUR 20-40bn, its lowest level since
2011. We expect an increase in gross supply from HY NFIs after 2022’s historical lows (EUR 19bn
YTD, expected to reach EUR 30bn by year-end) and zero net supply. The share of ESG-bond
issuance is expected to increase to 20% (vs. 15% YTD). Increased HY volume should occur on the
back of banks’ more-restrictive lending policies, pushing corporates to tap capital markets, and on
issuers’ willingness to signal to rating agencies their ability to access capital markets. In non-financial
hybrids, following EUR 10.1bn of issuance YTD (EUR 10-12bn of issuance was forecast for this year),
we expect to see EUR 12bn gross supply, leading (similarly to this year) to zero net supply. The
overall supply picture should be neutral to slightly positive for respective credit-market segments.
QT to be spread-neutral The expected start of quantitative tightening (QT) by the ECB in 2Q23 is unlikely to be a major driver
of European non-financial bonds. We expect the ECB to reduce its corporate-bond portfolio gradually,
by EUR 1.5bn worth of bonds per month, which we do not think will have a palpable spread impact as
we expect net issuance to decline sharply and QT to take place in a supply-favorable environment.
This year’s total-return losses We recommend starting 2023 with an overweight position in HY NFIs, where we expect to see a total
will be recovered only in high-
yield return of 11%, the highest since 2012. As such, we also expect HY to be the sole iBoxx NFI segment
able to recover its 2022 losses. Aside from the above-mentioned drivers, HY credit will also be
supported by its relative-value vs. equities, as its YTW compares attractively to dividend yields in
European stocks on a risk-reward basis (Chart 4). However, given growth uncertainty, we recommend
sticking primarily to BB rated credit and remaining cautious towards B and CCC rated credit, as
spreads are not compensating investors for a potential full-fledged recession, which remains a major
risk factor.
Focus is still on non-cyclicals Sector-wise, at this stage we are sticking to a defensive allocation, focusing on non-cyclical sectors
and sectors less exposed to
funding risk and energy costs and sectors less exposed to funding risk and energy costs. We are keeping our overweight
recommendation on Health Care and Telecoms and our underweight recommendation on Industrials,
Chemicals, Travel & Leisure and Retail.
CHART 3: EUROPEAN DEFAULT RATE VS. LOANS TO NON- CHART 4: REAL YTW AND DIV. YIELD OF IBOXX CORPORATES
FINANCIALS LENDING STANDARDS* AND EUROPEAN EQUITIES VS. VOLATILITY**
Credit stds. for bus loans - expected (ls, two quarters lag)
70 16.0% 7.0
Europe actual
60 14.0%
Base case forecast 6.0
50 HY NFI
Optimistic scenario 12.0%
40 5.0
Pessimistic scenario 10.0% STOXX Europe
30 4.0 600
8.0% NFI Sub
%
20 FIN Sub
6.0% 3.0
10
4.0% 2.0 FIN Sen
0
STOXX Europe
-10 2.0% NFI Sen 200
1.0
-20 0.0% Sub-Sov SuprasRegions
Agencies Sovereigns
Jun-08
Jun-13
Jun-18
Jun-23
Oct-06
Apr-09
Oct-11
Apr-14
Oct-16
Apr-19
Oct-21
Dec-05
Dec-10
Dec-15
Dec-20
Aug-07
Aug-12
Aug-17
Aug-22
Feb-10
Feb-15
Feb-20
0.0
0% 5% 10% 15% 20% 25%
Annualized volatility
*Our forecast is based on an OLS regression with changes in lending standards in various scenarios assumed. Base case: average lending conditions of the past three years assumed; pessimistic scenario: average over 2011-
13; optimistic scenario: average over 2014-16. **Real YTW is calculated using 7Y Bund breakeven yield; volatility is based on annualized daily total-return volatility over the past six months.
Source: Moody’s, ECB, IHS Markit, Haver Analytics, Bloomberg, UniCredit Research

Financials: senior and sub spreads to tighten in 2023, but

some spread pressure on covered bonds
Dr. Michael Teig ■ We expect spreads among Financials credit to remain volatile in 1H23 but to tighten in
Credit Strategist - Financials
Banks, Covered Bonds 2H23. We expect Banks senior spreads to tighten to 105bp by the end of 2023 (125bp
(UniCredit Bank, Munich) currently). For AT1s, we see tightening potential to 600bp by the end of 2023 (703bp
+49 89 378-12429
currently).
michael.teig@unicredit.de
■ We see carry as attractive entering 2023, given that yields among Banks credit are at
multi-year highs. Risks include the performance of housing markets, banks' asset-quality
trajectory and the impacts of the ECB's balance-sheet reduction.
We expect volatility in 1H23 but Credit spreads should be supported by evidence that the European recession will remain a
see bank credit spreads
tightening in 2H23 technical one and by easing inflation pressure in 2023. The attractive carry levels should prove
supportive of European Financials credit in 2023, outweighing any adverse effects from a
deterioration in asset quality. By the end of 2023, we expect spreads in the iBoxx EUR Banks
Senior to have tightened to 105bp (currently 125bp, Chart 5) and expect the spreads of AT1s to
tighten to 600bp (currently 703bp, Chart 6). Spreads of covered bonds however are expected to
gradually widen in 2023 by an estimated 10bp, driven by larger SSA supply and the start of
quantitative tightening in 2Q23.
CHART 5: BANKS SENIOR SPREAD FORECAST CHART 6: EUR-DENOMINATED AT1 SPREAD FORECAST
iBoxx EUR Banks Senior Spread expectation 2023 CoCo Index EUR Banks AT1 Spread expectation 2023
160 1,200
140
1,000
120
800
100
80 600
60
400
40
200
20
0 0
Jan-22 Apr-22 Jul-22 Sep-22 Dec-22 Mar-23 Jun-23 Sep-23 Dec-23 Jan-22 Apr-22 Jul-22 Sep-22 Dec-22 Mar-23 Jun-23 Sep-23 Dec-23
The dotted lines indicate +/-0.675 times the standard deviation of spreads in 2022, meaning that 50% of expected values are within the two dotted lines if one assumes a normal distribution of spreads.
Source: IHS Markit, UniCredit Research
Banks’ cost of risk is expected Amid banks’ tightening lending policies and rising energy and funding costs in our base-case
to rise, but this should be more
than made up for with higher scenario, we expect the 12-month trailing default rates for European speculative-grade corporate
revenues debt to increase, from 2.2% in September 2022 to 4% by the end of 2023. In our view, this is not
yet reflected in consensus forecasts for loan loss provisions for 2023. Aggregate 2023 loan loss
provisions for large banks in Europe are currently EUR 45bn, while a speculative default rate of 4%
would exceed levels seen in 2014, when aggregate loan loss provisions amounted to EUR 65bn
(Chart 7). However, banks’ 2023 consensus revenue expectations have been revised upward by
almost EUR 51bn in the year to date due to rising interest rates, and this should more than make
up for expected-higher loan loss requirements. We see the upcoming rise in risk costs as already
priced into current market expectations. As more data become available in 1H23, the manageable
asset-quality-deterioration trend should be confirmed, and this will support valuations.
Quantitative tightening by the We expect the ECB to start quantitative tightening in 2Q23, with a gradual reduction of APP
ECB to start in 2023
holdings, while its stock of PEPP bonds is expected to be reinvested in full for some time. We
expect an initial 5% cap on the amount of maturing APP bonds that are not reinvested. This would
translate into a reduction of the EUR 3.3tn APP stock of EUR 170bn per year. For covered bonds,

this implies an annual reduction of the EUR 300bn CBPP3 stock by EUR 16bn per year. An
estimated EUR 20bn of covered bonds in the CSPP3 portfolio mature between April 2023 and
December 2023. Only EUR 9bn of these will be reinvested by the ECB. This will put some spread-
widening pressure on covered bonds in 2023 in our view.
We expect strong momentum The 2022 year-to-date supply of EUR-denominated benchmark covered bonds rebounded strongly
in covered bond supply to
continue in 2023 to EUR 192bn (EUR 56bn net), above our revised full-year 2022 issuance forecast of EUR 190bn.
The absorption by investors has remained solid in 2022 although gross supply has doubled
compared to 2021 and the share of ECB orders has decline.
In 2023, we expect a gross euro benchmark covered bond supply of EUR 160bn (net supply of
EUR 26bn). Despite the slowdown in new mortgage loans, the positive net supply will be driven by
expected-large early TLTRO repayments and the favorable funding costs of covered bonds vs.
senior bonds. Banks still have large stocks of unutilized collateral in cover pools and spreads on
covered bonds are 90bp below spreads of senior preferred bonds on average.
Senior bond supply The 2022 year-to-date supply of EUR-denominated benchmark bank senior bonds is EUR 168bn,
close to our 2022 forecast of EUR 174bn. In 2023, a total of EUR 142bn of senior EUR-denominated
benchmark bank senior bonds will mature. We expect to see positive net supply of only EUR 20bn,
i.e. gross supply should amount to EUR 162bn. For 2023, we expect banks to refinance maturing
senior debt in order to fulfill the binding requirements as of 1 January 2024 for minimum for own funds
and eligible liabilities (MREL. The remaining MREL shortfall, as of 30 June 2022, was EUR 32bn,
including banks with an extended MREL deadline. Of this, EUR 11bn was attributed to banks in
Greece, EUR 7bn Italy, EUR 4bn Spain and EUR 3bn Portugal. Another driver of positive net supply
is the lending growth by banks to non-financial firms in order to replace capital-market funding and
inflation-driven higher volumes.
2023 relative value within the For 2023, we give the following recommendations: underweight for covered bonds, neutral for
capital structure
OpCo/senior preferred bonds and overweight for HoldCo/senior non-preferred bonds. In a spread-
tightening environment, we see more spread tightening for HoldCo/senior non-preferred bonds
which currently offer a spread pickup of 44bp. In the subordinated space we are neutral for Tier-2s
and overweight for AT1s. AT1s offer a very attractive carry with a yield of above 10% and an
expected total return of 14% in 2023, while we see the spread pickup of Tier-2s vs. HoldCo/senior
non-preferred bonds of currently 86bp as fairly priced and see more value in the AT1 segment.
CHART 7: LOAN LOSS PROVISIONS OF LARGE EUROPEAN CHART 8: SPREAD PERFORMANCE WITHIN THE CAPITAL
BANKS VS. SPECULATIVE-GRADE DEFAULT RATE STRUCTURE
Loan loss provisions CoCo Index EUR Banks AT1 Markit iBoxx EUR Banks Senior Preferred
Average loan loss provisions 2009-2023 (ls) Markit iBoxx EUR Banks Senior Bail-in iBoxx EUR Banks Subordinated
European speculative-grade default rate (rs, actual) iBoxx EUR Covered
UniCredit forecast European speculative-grade default rate (rs) 1,200
140 14%
1,000
120 12%
100 10% 800

in bn EUR
80 8%
bp
600
60 6%
40 4% 400
20 2% 200
0 0%
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 0
Jan-22 Feb-22 Apr-22 Jun-22 Jul-22 Sep-22 Nov-22
Source: Moody’s, Bloomberg, IHS Markit, UniCredit Research

ESG: greeniums should remain intact despite rising supply

Julian Kreipl, CFA, ■ For next year, we forecast ESG bond issuance of EUR 350bn, with all segments exceeding
Credit Strategist – ESG
(UniCredit Bank, Munich) this year’s issuance volumes, as regulations, the ECB’s greening policy and public
+49 89 378-12961 spending drive the market.
julian.kreipl@unicredit.de
Jonathan Schroer, CFA, ■ ESG themes remain in the spotlight, raising demand for ESG investments. We expect this
Credit Strategist – ESG to support greeniums at least at current levels for government and corporate bonds, while
(UniCredit Bank, Munich)
+49 89 378-13212 we might see some saturation lead to a decline in greeniums of supranationals.
jonathan.schroer@unicredit.de
ESG supply is expected to The ESG-labelled bond market suffered from increased inflation risk and geopolitical challenges in
increase again to EUR 350bn
2022, as volumes declined as in the overall bond market. Through early November, ESG issuance
in the EUR market amounted to EUR 309bn (-22% versus FY21), whereas the green bond segment
(EUR 199bn) proved especially robust, with last year’s record within reach (Chart 9). Overall, we do
not deem slower ESG issuance in 2022 to indicate a trend reversal but as rather having been
weighed on by adverse market conditions. For next year, we forecast that ESG bond issuance will
reach EUR 350bn, with all segments exceeding this year’s volumes. Green bonds should get a
push from the EU (30% of EUR 150bn in NextGeneration EU (NGEU) funding is expected to be
green), while the social-bond market will have to find replacements for the EU’s SURE program.
Sustainability bonds were dominated by SSA issuers this year (82%), but corporates should
contribute more next year. The sustainability-linked bond segment almost solely depends on
corporate issuers, and we expect an increase next year to EUR 30bn once HY issuers return.
Regulations, the ECB and As ESG topics have taken on central importance for society at large, this greater focus should
public spending will drive the
market foster increasing demand for ESG products. Government regulations continue to standardize
sustainability topics, which should ease investors’ concerns about greenwashing. This will be
accompanied by government-initiated financing of sustainable projects (NGEU, REPowerEU,
European Investment Bank, etc.) and by the ECB, which introduced ESG scores in its asset
purchases, offering companies further financial incentives to become greener.
Greeniums on govies and Despite this expected supply increase, rising investor demand for ESG assets (especially in
corporates are well-supported;
SSA greeniums could see a Europe) should get a boost from regulatory developments and increasing investor awareness.
decline This should at least keep greeniums at current levels. In contrast, increasing supply in the SSA
market should entail some saturation and a slight decline in the average greenium (4.4bp in
2022) towards 3bp. For sovereigns, we expect the average 3.5bp greenium to remain intact, as
the supply of green EGBs is set to remain limited as a share of overall issuance. For corporates,
we think greeniums (HY and IG) will at least trade flat as a result of rising demand. Issuance
growth would require that current greeniums remain intact so that companies can benefit from
strong demand for ESG finance.
CHART 9: ESG-LABELLED BONDS IN THE EUR MARKET CHART 10: CORPORATE GREENIUMS STILL INTACT
Green Social Sustainability SLB iBoxx € Non-Financials Senior Green Bonds

450
398 iBoxx € Non-Financials Senior Non-Green Bonds
400 120
350
44
350
40 309 30
300 24 40 95
237 105 34
ASW [bp]
EUR bn
250 60
29 52 70
200
150 93
124 45
100 208 199 220
50 97 110 20
Nov-21 Feb-22 May-22 Aug-22 Nov-22
0
2019 2020 2021 2022YTD 2023E
Supply volumes are current as of 9 November 2022. Source: Bloomberg, IHS Markit, UniCredit Research

November 2022
Error! Reference
source not found. Macro & Markets Outlook
Table 1: Annual macroeconomics forecasts

Government budget balance General government debt Current account balance
GDP (%) CPI inflation (%)* Central Bank Rate (EoP) (% GDP) (% GDP) (% GDP)
2022 2023 2024 2022 2023 2024 2022 2023 2024 2022 2023 2024 2022 2023 2024 2022 2023 2024
World 3.2 1.9 2.6
US 1.8 -0.1 0.9 8.1 4.6 2.1 4.50 5.00 3.50 -5.0 -4.5 -3.0 123.8 122.0 120.5 -3.5 -2.5 -2.0
Eurozone 3.2 0.0 1.0 8.6 5.9 2.1 2.00 2.75 2.00 -3.6 -3.9 -3.1 93.7 93.4 92.8 1.5 1.8 2.3
Germany 1.7** -0.2** 1.3** 8.2 7.0 2.9 - - - -2.5 -3.0 -2.0 65.1 63.9 63.4 3.5 4.3 5.0
France 2.5 0.2 1.1 5.3 4.4 2.0 - - - -4.9 -5.3 -4.8 111.6 112.1 112.3 -2.0 -1.8 -1.2
Italy 3.7 -0.1 0.9 8.1 5.7 2.2 - - - -5.5 -4.9 -4.2 145.7 145.3 144.3 -0.7 0.0 0.5
Spain 4.5 0.9 1.4 8.6 4.1 2.5 - - - -4.6 -4.3 -3.6 114.0 112.5 112.1 1.0 0.9 0.8
Austria 4.8 0.3 1.2 8.5 6.5 3.0 - - - -3.3 -3.0 -2.0 77.4 76.1 75.0 -0.5 -0.2 0.6
Greece 5.7 0.6 1.5 9.9 6.2 2.3 - - - -4.2 -2.5 -1.9 169.5 162.5 159.1 -8.4 -8.0 -7.3
Portugal 6.7 0.5 1.2 7.6 5.0 2.1 - - - -1.9 -1.4 -1.2 115.1 111.3 110.8 -1.7 -1.2 -1.0
CEE
Poland 4.7 0.3 3.1 18.4 10.3 5.3 6.75 6.75 6.00 -3.3 -4.0 -3.4 48.8 48.0 46.4 -3.8 -3.2 -1.9
Czechia 2.4 -0.4 2.7 16.5 9.5 3.2 7.00 6.00 3.75 -5.0 -5.0 -3.5 43.0 45.4 45.6 -3.7 -2.8 -1,6
Hungary 4.4 -1.1 3.5 23.3 11.7 5.6 13.00 12.00 7.00 -6.0 -4.1 -3.0 75.4 74.2 72.2 -7.0 -6.2 -3.6
Russia -4.0 -5.0 2.5 13.5 7.0 4.0 7.50 7.00 6.50 -2.3 -4.4 -3.3 14.4 18.3 20.6 11.4 7.0 6.3
Turkey 5.5 3.1 3.6 71.0 45.0 23.0 9.00 45.00 25.00 -4.7 -4.4 -3.3 38.5 37.4 35.3 -6.7 -4.0 -2.5
Other Europe
UK 4.4 -0.7 0.8 9.1 6.8 2.2 3.50 4.00 3.25 -6.9 -5.2 -3.5 101.7 107.6 110.5 -5.5 -4.0 -3.0
Sweden 3.2 0.2 1.5 7.3 4.5 1.5 2.00 2.25 1.75 0.4 0.0 -0.3 33.0 30.0 29.0 3.5 4.0 4.0
Norway 3.1*** 0.8*** 1.6*** 6.0 5.7 2.3 2.75 3.00 2.50 23.5 15.5 15.5 40.5 39.5 39.5 19.0 14.0 11.0
Switzerland 2.3 0.4 1.3 2.9 2.0 1.0 1.00 1.25 0.75 -0.7 -0.4 0.0 45.5 45.6 45.5 5.3 6.0 6.5
Others
China 3.3 4.2 3.6 2.1 2.3 2.0 4.35 4.15 4.15 -8.9**** -7.2**** -7.5**** 76.9 84.2 89.5 1.8 1.4 1.2
Japan 1.6 0.8 1.0 2.2 1.4 1.0 -0.10 -0.10 -0.10 -7.0 -4.5 -4.0 265 264 260 1.0 1.4 1.5
Source: UniCredit Research
*Annual averages, except for CEE countries, for which end-of-period numbers are used.
**Non-wda figures. Adjusted for working days: 1.8% (2022), 0.0% (2023) and 1.3% (2024).
***Mainland economy figures. Overall GDP: 2.5% (2022), 0.5% (2023) and 1.5% (2024).
****Official budgetary balances are adjusted according to IMF methodology to include government-managed funds, state-administered SOE funds, adjustment to the stabilization fund, and social security fund.

Table 2: Quarterly GDP and CPI forecasts

REAL GDP (% QOQ, SA)
3Q22 4Q22 1Q23 2Q23 3Q23 4Q23 1Q24 2Q24 3Q24 4Q24
US (non-annualized) 0.6 0.0 -0.3 -0.2 0.0 0.2 0.3 0.3 0.4 0.4
Eurozone 0.2 -0.4 -0.3 0.1 0.2 0.2 0.2 0.3 0.3 0.4
Germany 0.3 -0.4 -0.3 0.2 0.3 0.3 0.3 0.3 0.4 0.4
France 0.2 -0.1 -0.1 0.1 0.2 0.3 0.3 0.3 0.3 0.4
Italy 0.5 -0.6 -0.5 0.3 0.3 0.2 0.2 0.3 0.3 0.3
Spain 0.2 -0.1 0.0 0.3 0.3 0.3 0.4 0.4 0.4 0.5
Austria -0.1 -0.3 -0.2 0.2 0.3 0.3 0.3 0.3 0.4 0.4
CEE
Poland (% yoy) 3.5 1.7 -1.9 -1.2 1.6 2.4 2.7 3.2 3.7 2.7
Czechia -0.3 -0.9 -1.2 0.7 1.5 1.0 0.3 0.6 0.4 0.3
Hungary (% yoy) 4.0 -0.1 -3.1 -2.7 -0.8 1.9 3.5 3.4 3.5 3.5
Russia (% yoy) -4.4 -10.6 -10.2 -7.6 -4.1 2.7 3.3 2.8 2.1 1.8
Turkey (% yoy) 4.8 2.8 3.2 2.1 3.1 3.9 3.4 2.9 3.7 4.2
Other Europe
UK -0.2 -0.3 -0.3 -0.3 0.1 0.2 0.2 0.3 0.3 0.4
Sweden 0.7 -0.3 -0.4 0.2 0.3 0.3 0.3 0.5 0.5 0.6
Norway (mainland) 0.6 -0.1 0.0 0.3 0.4 0.4 0.4 0.5 0.5 0.6
Switzerland 0.2 -0.2 -0.1 0.2 0.4 0.4 0.3 0.3 0.3 0.3
CPI INFLATION (% YOY)
3Q22 4Q22 1Q23 2Q23 3Q23 4Q23 1Q24 2Q24 3Q24 4Q24
US 8.3 7.6 6.7 4.6 3.8 3.2 2.6 2.1 1.9 1.9
Eurozone 9.3 10.7 9.1 6.8 5.1 2.8 2.1 2.1 2.0 2.0
Germany 8.5 10.8 10.5 7.6 6.1 3.9 2.9 3.0 3.0 2.6
France 5.8 6.3 6.0 4.8 4.0 2.9 2.1 1.9 1.9 1.9
Italy 8.4 11.3 8.0 6.8 5.8 2.5 2.6 2.3 2.0 2.0
Spain (HICP) 10.0 7.7 5.5 4.0 3.3 3.5 2.7 2.6 2.3 2.3
Austria 9.7 10.7 10.2 7.2 5.2 3.4 3.1 3.1 3.0 2.6
CEE*
Poland 17.2 18.4 17.8 14.0 11.9 10.3 9.3 8.4 7.2 5.3
Czechia 18.0 16.5 14.8 10.9 8.9 9.5 5.8 5.5 4.8 3.2
Hungary 20.1 23.3 23.4 20.8 15.7 11.7 9.7 8.5 5.7 5.6
Russia 13.7 13.5 5.9 5.3 7.1 7.0 6.3 5.8 5.0 4.0
Turkey 83.5 71.0 61.7 53.8 51.0 45.0 34.3 28.6 25.6 23.0
Other Europe
UK 10.0 10.9 10.2 7.5 6.1 3.7 3.2 1.9 1.8 2.0
Sweden 8.9 8.0 7.3 5.1 3.1 2.5 1.6 1.6 1.5 1.5
Norway 6.7 7.4 8.1 6.9 4.5 3.6 2.6 2.4 2.1 2.0
Switzerland 3.4 3.2 3.2 1.9 1.5 1.4 0.8 0.9 0.9 1.1
*CEE CPI figures are end-of-period.

.
Source: UniCredit Research
Table 3: Oil forecasts

Current 1Q23 2Q23 3Q23 4Q23 1Q24 2Q24 3Q24 4Q24
Brent (USD/bbl, average) 92 105 102 98 95 95 92 90 90
UniCredit Research page 59

Table 4: Comparison of annual GDP and CPI forecasts

GDP (%)
IMF European Commission OECD
UniCredit (Oct-22) (Nov-22) (May/Sep-22)***
2022 2023 2024 2022 2023 2024 2022 2023 2024 2022 2023 2024
World 3.2 1.9 2.6 3.2 2.7 3.2 3.1 2.5 3.1 3.0 2.2 -
US 1.8 -0.1 0.9 1.6 1.0 1.2 1.8 0.7 1.7 1.5 0.5 -
Eurozone 3.2 0.0 1.0 3.1 0.5 1.8 3.2 0.3 1.5 3.1 0.3 -
Germany 1.7* -0.2* 1.3* 1.5 -0.3 1.5 1.6 -0.6 1.4 1.2 -0.7 -
France 2.5 0.2 1.1 2.5 0.7 1.6 2.6 0.4 1.5 2.6 0.6 -
Italy 3.7 -0.1 0.9 3.2 -0.2 1.3 3.8 0.3 1.1 3.4 0.4 -
Spain 4.5 0.9 1.4 4.3 1.2 2.6 4.5 1.0 2.0 4.4 1.5 -
Austria 4.8 0.3 1.2 4.7 1.0 1.9 4.6 0.3 1.1 3.6 1.4 -
Greece 5.7 0.6 1.5 5.2 1.8 2.2 6.0 1.0 2.0 2.8 2.5 -
Portugal 6.7 0.5 1.2 6.2 0.7 2.4 6.6 0.7 1.7 5.4 1.7 -
CEE
Poland 4.7 0.3 3.1 3.8 0.5 3.1 4.0 0.7 2.6 4.4 1.8 -
Czechia 2.4 -0.4 2.7 1.9 1.5 3.9 2.5 0.1 1.8 1.8 2.0 -
Hungary 4.4 -1.1 3.5 5.7 1.8 2.8 5.5 0.1 2.6 4.0 2.5 -
Russia -4.0 -5.0 2.5 -3.4 -2.3 1.5 -5.1 -3.2 0.9 -5.5 -4.5 -
Turkey 5.5 3.1 3.6 5.0 3.0 3.0 5.0 3.5 3.0 5.4 3.0 -
Other Europe
UK 4.4 -0.7 0.8 3.6 0.3 0.6 4.2 -0.9 0.9 3.4 0.0 -
Sweden 3.2 0.2 1.5 2.6 -0.1 2.1 2.9 -0.6 0.8 2.2 1.0 -
Norway 3.1** 0.8** 1.6** 3.6 2.6 2.2 2.5 1.8 1.9 4.0 2.3 -
Switzerland 2.3 0.4 1.3 2.2 0.8 1.8 2.2 1.2 2.0 2.5 1.3 -
Others
China 3.3 4.2 3.6 3.2 4.4 4.5 3.4 4.5 4.7 3.2 4.7 -
Japan 1.6 0.8 1.0 1.7 1.6 1.3 1.7 1.6 1.2 1.6 1.4 -
CPI INFLATION (%)****

IMF European Commission OECD
UniCredit (Oct-22) (Nov-22) (May/Sep-22)
2022 2023 2024 2022 2023 2024 2022 2023 2024 2022 2023 2024
US 8.1 4.6 2.1 8.1 3.5 2.2 7.9 3.4 2.3 6.2 3.4 -
Eurozone 8.6 5.9 2.1 8.3 5.7 2.7 8.5 6.1 2.6 8.1 6.2 -
Germany 8.2 7.0 2.9 8.5 7.2 3.5 8.8 7.5 2.9 8.4 7.5 -
France 5.3 4.4 2.0 5.8 4.6 2.4 5.8 4.4 2.2 5.9 5.8 -
Italy 8.1 5.7 2.2 8.7 5.2 1.7 8.7 6.6 2.3 7.8 4.7 -
Spain 8.6 4.1 2.5 8.8 4.9 3.5 8.5 4.8 2.3 9.1 5.0 -
Austria 8.5 6.5 3.0 7.7 5.1 2.5 8.7 6.7 3.3 6.7 4.7 -
Greece 9.9 6.2 2.3 9.2 3.2 1.6 10.0 6.0 2.4 8.8 3.4 -
Portugal 7.6 5.0 2.1 7.9 4.7 2.6 8.0 5.8 2.3 6.3 4.0 -
CEE
Poland 18.4 10.3 5.3 13.8 14.3 4.3 13.3 13.8 4.9 11.1 6.5 -
Czechia 16.5 9.5 3.2 16.3 8.6 2.5 15.6 9.5 3.5 13.0 5.6 -
Hungary 23.3 11.7 5.6 13.9 13.3 5.6 14.8 15.7 3.9 10.3 7.0 -
Russia 13.5 7.0 4.0 13.8 5.0 4.0 14.2 7.1 4.7 13.9 6.8 -
Turkey 71.0 45.0 23.0 73.1 51.2 24.2 71.7 54.1 40.4 71.0 40.8 -
Other Europe
UK 9.1 6.8 2.2 9.1 9.0 3.7 7.9 7.5 2.9 8.8 5.9 -
Sweden 7.3 4.5 1.5 7.2 8.4 3.5 8.1 6.6 1.8 6.5 5.4 -
Norway 6.0 5.7 2.3 4.7 3.8 2.7 5.3 4.6 3.3 4.6 3.3 -
Switzerland 2.9 2.0 1.0 3.1 2.4 1.5 3.0 2.5 2.0 2.5 1.8 -
Others
China 2.1 2.3 2.0 2.2 2.2 1.9 - - - 2.2 3.1 -
Japan 2.2 1.4 1.0 2.0 1.4 1.0 2.5 3.1 1.8 2.2 2.0 -
Source: IMF, European Commission, OECD, UniCredit Research
*Non-wda figures. Adjusted for working days: 1.8% (2022), 0.0% (2023) and 1.3% (2024).
**Mainland economy figures. Overall GDP: 2.5% (2023), 0.5% (2022) and 1.5% (2023).
***Economic Outlook (May 2022) and Interim Economic Outlook (September 2022).
****Annual averages, except for CEE countries, for which end-of-period numbers are used.

Table 5: FI forecasts
INTEREST RATE AND YIELD FORECASTS (%)
Current 1Q23 2Q23 3Q23 4Q23 1Q24 2Q24 3Q24 4Q24
EMU
Refi rate 2.00 3.25 3.25 3.25 3.25 3.25 3.00 2.75 2.50
Depo rate 1.50 2.75 2.75 2.75 2.75 2.75 2.50 2.25 2.00
3M Euribor 1.80 2.80 2.80 2.80 2.75 2.70 2.45 2.20 2.00
Euribor future 2.89 3.06 3.05 2.97 2.87 2.78 2.70 2.63
2Y Schatz 2.17 2.25 2.20 2.00 1.80 1.70 1.60 1.50 1.40
fwd 2.16 2.07 1.97 1.93 1.94 1.95 1.96 1.98
5Y Obl 2.07 2.30 2.25 2.10 1.90 1.80 1.70 1.60 1.50
10Y Bund 2.11 2.25 2.25 2.15 2.00 1.95 1.90 1.85 1.80
fwd 2.13 2.13 2.13 2.13 2.14 2.16 2.17 2.19
30Y Bund 2.05 2.25 2.25 2.20 2.10 2.10 2.10 2.05 2.00
2/10 -6 0 5 15 20 25 30 35 40
2/5/10 -15 10 5 5 0 -5 -10 -15 -20
10/30 -6 0 0 5 10 15 20 20 20
2Y EUR swap 2.89 3.05 3.00 2.70 2.40 2.25 2.15 2.05 1.95
5Y EUR swap 2.76 3.15 3.10 2.85 2.55 2.40 2.30 2.20 2.10
10Y EUR swap 2.81 3.05 3.05 2.85 2.60 2.50 2.45 2.40 2.35
10Y BTP 4.06 4.65 4.65 4.45 4.25 4.10 3.90 3.75 3.60
US
Fed Fund 4.00 5.00 5.00 5.00 5.00 4.75 4.50 4.00 3.50
3M OIS SOFR 4.27 4.80 4.80 4.80 4.72 4.47 4.15 3.64 3.28
fwd 5.03 5.01 4.74 4.19 3.94 3.66 3.45 3.09
2Y UST 4.34 4.50 4.50 4.40 4.30 3.95 3.65 3.30 3.00
fwd 4.25 4.14 4.04 3.95 3.86 3.78 3.70 3.63
5Y UST 3.90 4.10 4.10 4.00 3.90 3.60 3.30 3.10 2.90
10Y UST 3.77 4.00 4.00 3.90 3.75 3.60 3.40 3.25 3.10
fwd 3.79 3.79 3.78 3.79 3.80 3.81 3.82 3.83
30Y UST 3.96 4.20 4.20 4.10 4.00 3.80 3.70 3.65 3.60
2/10 -57 -50 -50 -50 -55 -35 -25 -5 10
2/5/10 -32 -30 -30 -30 -25 -35 -45 -35 -30
10/30 19 20 20 20 25 20 30 40 50
2Y USD swap 4.34 4.45 4.45 4.35 4.25 3.90 3.60 3.25 2.95
10Y USD swap 3.46 3.75 3.75 3.70 3.55 3.40 3.20 3.05 2.90
UK
Key rate 3.00 4.00 4.00 4.00 4.00 4.00 3.75 3.50 3.25
Spreads in bp Current 1Q23 2Q23 3Q23 4Q23 1Q24 2Q24 3Q24 4Q24
10Y UST-Bund 166 175 175 175 175 165 150 140 130
10Y BTP-Bund 195 240 240 230 225 215 200 190 180
10Y EUR swap-Bund 71 80 80 70 60 55 55 55 55
10Y USD swap-UST -31 -25 -25 -20 -20 -20 -20 -20 -20
Forecasts are end-of-period Source: Bloomberg, UniCredit Research

Table 6: FX forecasts
EUR Current 1Q23 2Q23 3Q23 4Q23 1Q24 2Q24 3Q24 4Q24 3M 6M 12M
G10
EUR-USD 1.04 1.00 1.03 1.05 1.07 1.08 1.09 1.10 1.12 1.00 1.02 1.06
EUR-CHF 0.98 0.99 1.00 1.01 1.02 1.02 1.03 1.04 1.05 0.99 1.00 1.02
EUR-GBP 0.88 0.87 0.87 0.88 0.88 0.89 0.89 0.90 0.91 0.87 0.87 0.88
EUR-JPY 145 143 144 145 147 147 147 147 150 142 144 146
EUR-NOK 10.37 10.20 10.15 10.10 10.05 10.00 9.95 9.90 9.85 10.26 10.17 10.07
EUR-SEK 10.86 10.70 10.65 10.60 10.55 10.53 10.50 10.48 10.45 10.75 10.67 10.57
EUR-AUD 1.54 1.49 1.51 1.52 1.53 1.52 1.51 1.51 1.51 1.49 1.51 1.53
EUR-NZD 1.69 1.64 1.66 1.64 1.67 1.66 1.65 1.64 1.65 1.63 1.65 1.66
EUR-CAD 1.38 1.32 1.35 1.37 1.37 1.37 1.37 1.38 1.39 1.32 1.34 1.37
EUR TWI 96.4 95.9 96.4 97.4 97.8 99.5 99.2 99.7 100.1 96.1 96.2 97.6
CEEMEA & CHINA
EUR-PLN 4.72 4.75 4.70 4.78 4.80 4.80 4.78 4.80 4.85 4.74 4.72 4.79
EUR-HUF 407 415 415 412 425 422 423 425 430 412 415 421
EUR-CZK 24.34 25.20 25.40 25.50 25.60 25.50 25.40 25.30 25.20 24.91 25.33 25.57
EUR-TRY 19.33 23.00 23.18 20.16 20.33 21.06 21.80 22.22 23.52 20.99 22.80 20.27
EUR-RUB 63.01 77.50 84.98 91.35 96.30 102.60 109.00 111.65 115.47 70.51 82.45 94.64
EUR-CNY 7.38 7.18 7.36 7.46 7.54 7.56 7.63 7.65 7.73 7.15 7.30 7.51
USD Current 1Q23 2Q23 3Q23 4Q23 1Q24 2Q24 3Q24 4Q24 3M 6M 12M
G10
EUR-USD 1.04 1.00 1.03 1.05 1.07 1.08 1.09 1.10 1.12 1.00 1.02 1.06
USD-CHF 0.94 0.99 0.97 0.96 0.95 0.94 0.94 0.95 0.94 0.99 0.98 0.96
GBP-USD 1.19 1.15 1.18 1.20 1.21 1.21 1.22 1.22 1.23 1.15 1.17 1.21
USD-JPY 139 143 140 138 137 136 135 134 134 142 141 137
USD-NOK 9.96 10.20 9.85 9.62 9.39 9.26 9.13 9.00 8.79 10.26 9.97 9.47
USD-SEK 10.43 10.70 10.34 10.10 9.86 9.75 9.63 9.53 9.33 10.75 10.46 9.94
AUD-USD 0.68 0.67 0.68 0.69 0.70 0.71 0.72 0.73 0.74 0.67 0.68 0.70
NZD-USD 0.62 0.61 0.62 0.64 0.64 0.65 0.66 0.67 0.68 0.61 0.62 0.64
USD-CAD 1.33 1.32 1.31 1.30 1.28 1.27 1.26 1.25 1.24 1.32 1.31 1.29
USTW$ 90.8 101.0 98.9 97.4 96.0 95.2 94.5 93.8 92.8 97.6 99.6 96.5
DXY 106.4 109.7 106.9 105.1 103.4 102.6 101.8 101.0 99.7 108.6 107.8 104.0
CEEMEA & CHINA
USD-PLN 4.51 4.75 4.56 4.55 4.49 4.44 4.39 4.36 4.33 4.74 4.62 4.51
USD-HUF 391 415 403 392 397 391 388 386 384 412 407 396
USD-CZK 23.40 25.20 24.70 24.30 23.90 23.60 23.30 23.00 22.50 24.90 24.80 24.00
USD-TRY 18.61 23.00 22.50 19.20 19.00 19.50 20.00 20.20 21.00 20.99 22.36 19.07
USD-RUB 60.66 77.50 82.50 87.00 90.00 95.00 100.00 101.50 103.10 70.51 80.84 89.00
USD-CNY 7.09 7.18 7.15 7.10 7.05 7.00 7.00 6.95 6.90 7.15 7.16 7.07
Forecasts are end-of-period Source: Bloomberg, UniCredit Research

Table 7: Risky assets forecasts

EQUITY AND CREDIT FORECASTS
Current Mid-2023 End-2023

Equities
Euro STOXX 50 3883 3900 4200
STOXX Europe 600 430 435 470
DAX 14234 14300 15500
MSCI Italy 63.4 64 69
S&P 500 3959 4000 4300
Credit
iBoxx Non-Financials Senior 85 80 65
iBoxx Banks Sen 125 118 105
iBoxx High Yield NFI 417 400 350
Source: Bloomberg, IHS Markit, UniCredit Research
EQUITY SECTOR ALLOCATION WESTERN EUROPE
Portfolio weight Portfolio Strength of

over/underweight – position over/underweight
STOXX Europe 600 Sector (% points) (%) in % of sector weight
Automobiles & Parts 1 3.3 43
Banks 0 8.1 0
Basic Resources -0.5 2.0 -20
Chemicals -0.5 3.4 -13
Construction & Materials -1 2.4 -30
Consumer Products & Services -0.5 5.6 -8
Energy 0 6.1 0
Financial Services 0 3.6 0
Food, Beverage & Tobacco 1 8.8 13
Health Care 1 18.0 6
Industrial Goods & Services 0 12.9 0
Insurance 1 6.4 18
Media 0 1.5 0
Personal Care, Drug & Grocery Stores -0.5 1.9 -21
Real Estate -1 0.5 -67
Retail -0.5 0.2 -68
Technology 1 7.2 16
Telecommunications 0 3.2 0
Travel & Leisure -0.5 0.6 -44
Utilities 0 4.2 0

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E 20/1

UniCredit Research* Macro & Strategy Research
Marco Valli Dr. Ingo Heimig

Global Head of Research, Head of Research Operations
Chief European Economist & Regulatory Controls
+39 02 8862-0537 +49 89 378-13952
marco.valli@unicredit.eu ingo.heimig@unicredit.de
Head of Macro Research Heads of Strategy Research
Marco Valli Dr. Luca Cazzulani Elia Lattuga

Global Head of Research, Head of Strategy Research Cross Asset Strategist
Chief European Economist FI Strategist Deputy Head of Strategy Research
+39 02 8862-0537 +39 02 8862-0640 +39 02 8862-0851
marco.valli@unicredit.eu luca.cazzulani@unicredit.eu elia.lattuga@unicredit.eu
European Economics Research

Dr. Andreas Rees Dr. Loredana Federico Stefan Bruckbauer Tullia Bucco Edoardo Campanella
Chief German Economist Chief Italian Economist Chief Austrian Economist Economist Economist
+49 69 2717-2074 +39 02 8862-0534 +43 50505-41951 +39 02 8862-0532 +39 02 8862-0522
andreas.rees@unicredit.de loredanamaria.federico@ stefan.bruckbauer@ tullia.bucco@unicredit.eu edoardo.campanella@unicredit.eu
unicredit.eu unicreditgroup.at
Walter Pudschedl Chiara Silvestre

Economist Economist
+43 50505-41957 chiara.silvestre@unicredit.eu
walter.pudschedl@unicreditgroup.at
International Economics Research FX Strategy Research

Daniel Vernazza, Ph.D. Roberto Mialich
Chief International Economist FX Strategist
+44 207 826-7805 +39 02 8862-0658
daniel.vernazza@unicredit.eu roberto.mialich@unicredit.eu
FI Strategy Research
Michael Rottmann Dr. Luca Cazzulani Francesco Maria Di Bella Kornelius Purps
Head Head of Strategy Research FI Strategist FI Strategist
FI Strategist FI Strategist +39 02 8862-0850 +49 89 378-12753
+49 89 378-15121 +39 02 8862-0640 francescomaria.dibella@unicredit.eu kornelius.purps@unicredit.de
michael.rottmann1@unicredit.de luca.cazzulani@unicredit.eu
Credit & Equity Sector Strategy Research

Christian Stocker, CEFA Dr. Stefan Kolek Dr. Michael Teig
Lead Equity Strategist Credit Strategist - Non-financials Credit Strategist - Financials
+49 89 378-18603 +49 89 378-12495 +49 89 378-12429
christian.stocker@unicredit.de stefan.kolek@unicredit.de michael.teig@unicredit.de
Julian Kreipl, CFA Jonathan Schroer, CFA

Credit Strategist - ESG Credit Strategist - ESG
+49 89 378-12961 +49 89 378-13212
julian.kreipl@unicredit.de jonathan.schroer@unicredit.de
Cross Asset Strategy Research

Elia Lattuga
Cross Asset Strategist
Deputy Head of Strategy Research
+39 02 8862-0851
elia.lattuga@unicredit.eu
UniCredit Research, UniCredit Bank AG, Arabellastraße 12, D-81925 Munich, globalresearch@unicredit.de
M/S 22/6
Bloomberg: UCGR, Internet: www.unicreditresearch.eu
*UniCredit Research is the joint research department of UniCredit Bank AG (UniCredit Bank, Munich or Frankfurt), UniCredit Bank AG London Branch (UniCredit Bank, London), UniCredit Bank AG Milan Branch
(UniCredit Bank, Milan), UniCredit Bank AG Vienna Branch (UniCredit Bank, Vienna), UniCredit Bank Austria AG (Bank Austria), UniCredit Bulbank, Zagrebačka banka d.d., UniCredit Bank Czech Republic and
Slovakia,ZAO UniCredit Bank Russia (UniCredit Russia), UniCredit Bank Romania.

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The UniCredit

Macro & Markets

Macro Research 17 November 2022

“ Go for carry as central banks approach peak rates

Editors: Marco Valli, Global Head of Research (UniCredit Bank, Milan)

58 Table 1: Annual macroeconomics forecasts

Editorial deadline: 16 November 2022 18:00 CET

UniCredit Research page 2 See last pages for disclaimer.

■ Inflation in the US (mainly demand-pull) remains fundamentally different from that in

■ In CEE countries belonging to the EU (EU-CEE), GDP is expected to grow by 0.4% in

UniCredit Research page 3 See last pages for disclaimer.

CHART 1: A MILD RECESSION AHEAD CHART 2: VARYING TERMS OF TRADE SHOCKS

Source: IMF, OECD, World Bank, UniCredit Research

UniCredit Research page 4 See last pages for disclaimer.

2. Key judgements and risks

US actual and expected inflation, % yoy

Zillow Observed Rent Index 8.0

UniCredit Research page 5 See last pages for disclaimer.

Core goods Core services Core services excluding shelter

Source: BLS, NY Fed, UniCredit Research

UniCredit Research page 6 See last pages for disclaimer.

Source: Bloomberg, UniCredit Research

UniCredit Research page 7 See last pages for disclaimer.

Source: BEA, UniCredit Research

UniCredit Research page 8 See last pages for disclaimer.

Source: BLS, UniCredit Research

UniCredit Research page 9 See last pages for disclaimer.

Manufacturing PMI Manufacturing PMI

Source: S&P Global, UniCredit Research

UniCredit Research page 10 See last pages for disclaimer.

Source: Eurostat, ECB, UniCredit Research

UniCredit Research page 11 See last pages for disclaimer.

Backlog orders, in months Wage growth, in % yoy; *1H22

Source: Ifo, Bundesbank, UniCredit Research

UniCredit Research page 12 See last pages for disclaimer.

Fiscal policy outlook: expansionary stance to continue

UniCredit Research page 13 See last pages for disclaimer.

(standardized values) 9 300

Dec-07 May-10 Oct-12 Mar-15 Aug-17 Jan-20 Oct-22

Source: Bruegel, INSEE, UniCredit Research

UniCredit Research page 14 See last pages for disclaimer.

Loss of parliamentary majority risks undermining Macron’s

UniCredit Research page 15 See last pages for disclaimer.

Source: EC, Istat, UniCredit Research

UniCredit Research page 16 See last pages for disclaimer.

Italy’s next economic challenges require prudence

UniCredit Research page 17 See last pages for disclaimer.

Source: INE, UniCredit Research

UniCredit Research page 18 See last pages for disclaimer.

Source: Statistik Austria, UniCredit Research

UniCredit Research page 19 See last pages for disclaimer.

UniCredit Research page 20 See last pages for disclaimer.

UniCredit Research page 21 See last pages for disclaimer.

6 Cyclical and non-cyclical core, energy and fuels, and food.

UniCredit Research page 22 See last pages for disclaimer.

Source: national statistical offices, European Commission, UniCredit Research

UniCredit Research page 23 See last pages for disclaimer.

Source: statistical offices, central banks, UniCredit Research

CEE needs a common European