Growing but Slowing

EExxececuuttiivve e PPererssppececttiivveses Growing but Slowing— Planning for the World Economy in 2022 October 2021

GROWING BUT SLOWING As executives turn to planning the year ahead, they face a growing but slowing global economy. Although stimulus is fading, consumers are well placed to carry the expansion forward. But leaders must also navigate risks that—while contained for the macroeconomy as a whole—can threaten individual sectors and firms. In planning the next chapter, leaders should start with a macro view in mind and translate 0 2. n that systematically to their markets, situations, and strategies. o i s r e 1 V 202 r e BCG Executive b o t KEY MACRO TRENDS COMPANIES MUST CONSIDER c 25 O ed t a Perspectives Fiscal policy and vaccines have underpinned a successful global rebound, though with d p u es varying degrees of structural scarring. As stimulus retreats and the growth bounce v i t ec p fades, households can tap booming labor markets as well as strong savings and balance s IN THIS DOCUMENT er P e v sheets to pick up where policy makers left off. While the economic recovery is slowing, the i t u ec growth context is strong for 2022 and the Delta variant has shifted growth out, not down. x E G C B . ed v er es r s t h g US DEEP DIVE | FACTOR IN US DYNAMICS AND RISKS i r l l A . p At the frontier of the global recovery, the US is the first to navigate risks related to the strong u o r G g rebound. Bottlenecks in labor markets will take more time to ease and even when they do, n i t l u s wage pressures will continue, necessitating that firms invest in productivity growth. Product n o C n o market bottlenecks will also persist as demand overshoot will keep straining productive t s o B capacity and inflict intense localized pain. Inflationary pressures will continue in the first half y b 1 2 0 of 2022 but are less likely to be structural. The retreat of monetary policywill likely be slow, 2 © t h g but policy errors remain the greatest risk of potential volatility to markets and the economy. i r y p o 2 C Source: BCG

Planning season: 12 priorities emerging from macroeconomic trends Context Six macro trends in 2022 Considerations when planning for 2022 pages 0 2. n o 1 i Prepare for growing but slowing macro outlook, as many economies return to tight conditions s r Growth slowdown 4-5 e 2 Account for multiple growth dynamics as varying degrees of structural scarring materialize 1 V 202 r e b o t c 25 O Consumer-led recovery 3 Focus on drivers behind consumers’ ability to sustain recovery asfiscal stimulus retreats ed t 6-8 a d going forward Assess demand shifts and the drivers and sustainability of consumption overshoots p 4 u es v i t ec p s er 5 Expect acute bottlenecks to ease as intense “scramble” to rehire workers lessens P Labor market e v i t 10-12 u Protect margins with productivity-enhancing investments as wage pressures will persist ec bottlenecks 6 x E G omy C B . on ed c v e Product market 7 Monitor economy’s inventory dynamics to separate macro stress from intense localized pain er es S r s 13 t h g U bottlenecks 8 Invest in supply chain resilience to continue recovering and prepare for future disruptions i r e l l h A . p u o r om t G 9 Understand and monitor the drivers of cyclical vs. structural inflation to assess risks g r Inflationary n i t f l s 14-16 u t s n h pressures 10 Do not conflate temporary pricing power with persistent pricing power and act accordingly o C g i n o t s s n o I B y 11 b Monetary policy Plan for soft and orderly exit from ultra-low policy rates but risk of faster pace of tightening 1 2 0 17 2 © and rates 12 Consider the risk of volatility as policy errors have potential to upset markets and even the cycle t h g i r y p o 33 C Source: BCG

A fast and strong global recovery—with varying degrees of structural 1 scarring and an expected growth slowdown in 2022 Global economy has rebounded …with levels recovery within sight everywhere, but trend recovery has wider strongly since the depths… distribution (structural scarring) in emerging markets 0 2. n o i US Germany Japan s s r World GDP e et Levels recovery: Completed Levels recovery: Expected soon Levels recovery: Expected soon 1 V k 202 r 100 r Trend recovery: Overshoot expected Trend recovery: Not full Trend recovery: Not full e b o Trend recovery a t )22 1)3.50 ) c 1s s 1s 95 m 25 O 1) n21 n n o o560 ed s o i i t i l l a ed l l l d n l i 3.25 i i r r p o 90 p r20 t t u i t 540 l € es l o $ ¥ v i 5 i r 219 1 5 t t el 1 0 3.00 1 ec 0 0 p $85 2 2 2520 s 5 (18 ( ( er Levels recovery P 1 ev e v i 0 17 2.75 500 t 2 80 D u ( ec 2015 2020 2025 2015 2020 2025 2015 2020 2025 x E G 75 C B . ed s China Brazil India v 70 t er es e Levels recovery: Completed Levels recovery: Completed Levels recovery: Expected soon r s 2015 2017 2019 2021 2023 2025 t k h g r i Trend recovery: Completed Trend recovery: Not full Trend recovery: Large impairment r ) l 1 l s A . ) ) n p ma 1 1 200 u s o o s i r l n n l G Global economy has made a “levels o i g g i o2.0 r 180 n l125 i t i l l t n i l e l r i u recovery” (back to 2019 output levels) i t r e s t 160 n g p o B l C r a u M e n but will take more time to return to 1.8 R140 o 100 t R R 5 s 5 0 0 o me / B pre-COVID trend(i.e., structural 1 0 4 120 y E 0 0 0 b 2 2 1 ( ( 0 2 scarring) 75 1.6 2 100 0 ( 2 © 2015 2020 2025 2015 2020 2025 2015 2020 2025 t h g i r y p Growth slowdown in 2022 built into V-shapes, returning many economies to a 2019-like growth environment o 44 C 1. SAAR (Seasonally adjusted annual rate); Source: Oxford Economics, BCG

1 Stimulative fiscal policy, which successfully contained structural damage, is now (appropriately) in retreat around the world Fiscal stimulus successfully limited structural …but now flips from being tailwind to headwind 1 damage… (as it is expected to fade in 2022) 0 2. n o i s r e COVID fiscal stimulus (% of GDP) 1-year change in government balance (%) 1 V 202 r e b o 0 5 10 15 20 25 30 t 2 -25 c 25 O Increasing deficits ed Poland t Switzerland -20 a US d Russsia provided economic US Euro area China p ) 0 Canada Japan u . es v i s % Netherlands tailwind t v , France Germany -15 ec P Sweden p ( s P D -2 Italy er P D e G China v i Australia -10 t G South u ec -4 Saudi x Korea UK E 2024 Brazil G 2024f Arabia -5 C B f o Argentina Spain . e ed ot -6 v e a er t 0 es a m Mexico Indonesia r i s t m t h i g t s i r Extent of ultimate l s e-8 South Thailand 5 l A eD . I Africa Shrinking deficits p t recovery loosely u o n V r e O point toward G r -10 linked to the size of g 10 n r C i t - economic headwind l u u the deployed fiscal s C re n o C p stimulus -12 15 n o t s o B y India 20 b 1 -14 2 0 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3E Q4E Q1E Q2E Q3E Q4E 2 © t h g 2019 2020 2021 2022E i r y p o 1. Sample G20 + Netherlands, Poland, Sweden, Switzerland, Spain; Turkey is left out due to data issues/reliability 5 C Source: IMF, Oxford Economics, BCG

1 Recoveries throughout the world in 2021 are currently in a “risky window” of handoff from policy makers to consumers Retail sales have overshot, initially supported by stimulus, but lately have been maintained by the consumer 0 2. n o i s r Retail sales (Index = 100 for 01/2019) e 1 V 202 r e b o t US France c 130 25 O ed t 120 a d p 110 2019 average u es v i t 100 Currently retail sales in the US are more than 25% ec p s er 90 higher compared with the beginning of2019, P e v i t 80 translating into more than an extra $100 billionin u ec x 70 E G sales per month C B . ed v er es r UK Brazil s t 130 The rest of the post-COVID expansion depends even h g i r l l 120 A more on consumers’ ability to carry it forward . p u o 110 r G g n i 100 t l u s n 90 The household sector is well positioned to sustain o C n o 80 t demand—and is even able to push demand higher s o B 70 y b 1 01/19 07/19 01/20 07/20 01/21 07/21 01/19 07/19 01/20 07/20 01/21 07/21 2 0 2 © t h g i r y p o Note: Retail sales in value terms (i.e., nominal). Due to difference in country definition, retail sales are best used looking across time within a country rather than across countries, so compare the green vs. yellow lines. 66 C Source: BEA, Office for National Statistics, Ist Nat de la Statistique et des Etudes Economiques, Russian - European Centre for Economic Policy/Haver Analytics, BCG

1 Consumers in strong position to sustain expansion due to booming labor markets, large savings, and record wealth Strong job opportunities lift Households have accumulated Wealth growth across nations consumer outlook in many countries trillions in savings during pandemic 0 2. Household checking deposit n o i s r (indexed to 12/19 values = 100) e Germany 1 V US 202 r e Of US respondents say there are b o 200 t plentiful jobs in the market 300 Increase in financial wealth c ~55% $18.6tn 25 O in the US ed t (highest since 2000-2001) a +€0.3tn d +$2.3tn p 150 u 200 savings es v savings i accumulated t ec accumulated p s er P 100 e v i 100 t (€1.8tn) u Of UK hospitality businesses ($1.2tn) ec x Increase in financial wealth E G 55%+ view staff availability as a C €0.67tn B in Germany . ed constraint on growth Japan UK v er es r 200 200 s t h g i r l l A . p u o +¥100tn +£0.3tn r 150 150 G g savings savings n i Is median duration to find a job t l u accumulated accumulated Increase in financial wealth s n in Australia, down from 27 o C 13 wks. ¥91.3tn in Japan n o 100 100 t s weeks last year (¥500tn) (£1.5tn) o B 9 0 0 0 0 1 1 9 0 0 0 0 1 1 y b 1 2 2 2 2 2 2 1 2 2 2 2 2 2 1 / / / / / / / / / / / / / / 2 0 2 3 6 9 2 3 6 2 3 6 9 2 3 6 2 1 0 0 0 1 0 0 1 0 0 0 1 0 0 © t h g i r y p o Note: rounded numbers 7 C Sources: Conference Board, Federal Reserve Board, Bank of Japan, Deutsche Bundesbank, UK Office for National Statistics, Australian Bureau of Statistics, BCG

1 Economies have also begun to "decouple" from the virus, meaning that COVID case surges likely to shift recovery and growth out but not down Economies have largely decoupled from virus trajectory In the US, the spike in Delta COVID cases changed – in India, larger second wave drove smaller drawdown growth expectations –pushing it out, not down 0 2. n o i s r e 1 V 202 r e b o t c 25 O Quarterly annualized, trillion 2011/12 Rupee Quarterly annualized, trillion 2012 USD ed t a 160 d p 20 u es v i 140 Delta surge shifted growth t GDP ec GDP p Pernicious second 18 s expectations out but not er path P 120 wave, comparatively path e v i t modest GDP drawdown 16 down u ec x 100 E • Surge in cases G C B moderated growth . ed v Case count (monthly, millions) Case count (monthly, millions) er estimates in second es r s t Modest first h 10 g 8 half of 2021 i r l wave, enormous l A . 6 • …but also contributed p GDP drawdown Virus u o Virus 5 r 4 G path to rising estimates in g n i t path l u 2 s all quarters of 2022 n o 0 C 0 n o 2018 19 20 21 22E t 2018 19 20 21 22E s o B y b 1 2 0 2 © t h g i r y p o 8 C Sources: Bloomberg, Federal Reserve Economic Data, Johns Hopkins Our World in Data, Projections from Oxford Economics, BCG

US deep dive | Overall healthy outlook for 2022, with need to navigate 2 four risks of the 2022 macroeconomic environment Important to consider US economic outlook in your 2022 planning: US economy at frontier of rebounding global economy: US stimulus has led the world and 0 2. n o i s delivered a faster and stronger rebound than in most other economies. It also means that the US is r e the first to experience bottlenecks in labor and product markets associated with a strong 1 V 202 r e b consumption overshoot -dynamics that are growing around the world o t c 25 O ed t a US centrality to global system: US dynamics matter not only because of weight of US economy in d p u es v global system but also for financial and monetary policy spillovers to the rest of the world i t ec p s er P e v i t u ec In the US, consumerspending will support a healthy outlook for 2022, with expected growth still above x E G C B (long-term) trends. Although risks are likely to ease, need to monitor and manage four areas: . ed v er es r s t h g i r l l A 1 2 3 4 . p u o r G g n i t l u s n o C n o t s o Labor market Product market Inflationary Monetary policy B y b 1 2 0 bottlenecks bottlenecks pressures normalization 2 © t h g i r y p o 9 C Source: BCG

2.1 Bottlenecks in labor and product markets will take time to ease—with 2.2 different rates of normalization of demand and supply US economy operates above pre-COVID levels ... but with 5 million fewer workers 0 2. n o i s r e 1 V 202 r Trillions of real 2012 USD Number of workers (millions) e b o t c 20 160 25 O ed t a d p u es v i 19 5M t ec 150 p s workers er P e v i t 18 u ec x E 140 G C B . ed 17 v er es r s t h g 130 i r l 16 l A . p u o r G g n i t l 15 120 u s n 2015 16 17 18 19 20 21 2015 16 17 18 19 20 21 o C n o t s o B y b 1 2 0 2 © t h g i r Such a fast divergence is impossible without causing bottlenecks across the economy y p o 1010 C Source: BEA, BLS, BCG

Laborbottlenecks: Labor demand in the US is still below pre-COVID levels— 2.1 hiring difficulties and wage growth driven more by speed of hiring Total labor demand remains below pre- … but those who fired in a big way have scrambled to hire workers COVID levels… back in a big way—and have had to pay much higher wages 0 2. n o i s r Millions of jobs Wage growth (Y/Y) e 1 V 202 r 8 16% e b US hiring until Sept o t 22 million workers let go during c 1 2021 (left axis) 25 O 12% the pandemic in just 2 months US wage growth ed t a d (right axis) p 4 8% u Average hourly earnings es v i t ec p 4% s er P e v i t 17 million have been hired back 0 0% u ec x 2 E over a much longer period G C B . ed v er -4 es r Layoffs during the s t h g 1 i r pandemic (left axis) l Even if all the new open positions l A . p u o (~4 million) were filled today, r G -8 g n i payrolls (total labor demand) would t l u s n still be below pre-COVID levels o C / y / l r . / . t s s s f e f s s n e al fo o n aide e e e on u rtng l i lede e ng e t r li olth essc c i i u n c s ia t a i h i t n o s b n c a a I i ti o ta t e r n v v ood s r v ni li B sui ae t i c p u ra t i y R s Ot u g an le ti b eip cH r ma o u 1 s u e ns ma n o M 2 L ser ser t l h s i ser U 0 o du B s b rare nd F h 2 E o © H a T a W t on r N h ood g u i C W g r y D p o 11 C 1. "Layoff" difference between 2020/2021 minimum and Dec 2019; “hiring" change between minimum and Sept 2021. 2. Note: even under the best of circumstances, it takes more time to hire than to fire. Source: BLS, BCG

1.8 Real wage pressures will persist as the US labor market quickly returns to 2.1 tightness, necessitating a strategic response by firms to protect margins US post-COVID cycle returning to tightness in record time… …necessitates planning for persistent 14% wage pressures 0 2. n o i s r Post-COVID expansion e 12% (starting 2020) on verge of While hiring difficulties will likely ease, 1 V 202 r e the labor market will not return to the b turning “tight” o t easy condition that lasted for most of c 25 O 10% ed t the previous cycle—it will remain tight a 1 d Post-GFC expansion (starting 2009) p e u t es v took ~90 months to turn tight i a 8% t r ec t p s Wage growth will put cyclical pressure er en P e v i m t y on margins—firms forced to absorb or u ec o 6% x l E p offset with greater productivity growth G C B . ed em v n 4% er es U r s Passing through to consumers not t h g i r l possible for every company, all the time— l A . p 2% u Level of unemployment at which labor o risk of loss of market share r G g market is considered tight (u*) n i t l u s n o C 0% n o Tight cycles, when labor is less available, t s 1 13 25 37 49 61 73 85 97 109 121 o B tend to spur capital investment and lift y b 1 2 Months into expansion 0 productivity growth cyclically 2 © t h g i r y 1. Dark green curve shows global financial crisis of 2008/2009 p o Note: u* at Mar 2017 12 C Source: NBER, BLS, CBO, BCG

In US product markets, many firms also struggle to meet demand and 2.2 experience disrupted supply chains, largely due to high goods consumption Inventory-to-sales ratios are low… …largely driven by high goods ...while inventories are mostly stable, 0 2. n o i consumption… though many painful exceptions persist s r e High goods consumption persists even as vaccines 1 V 202 r e and easing restrictions allow services to come back b o t c 25 O Retail inventory-to-sales ratio Goods and service consumption (relative to baseline) Inventory (100 = 12/2019) ed t a Wholesale: d 1.8 120 p 100 nondurable u es v i Goods consumption proxy t ec p Retail (excl.auto) s er 1.6 P 50 e v i t 100 u ec x Wholesale: E G 1.4 durable C B 0 . ed v er 80 es r s t 1.2 h g -50 i r l Services l A Retail: auto . p consumption u o r G 1.0 proxy 60 g n -100 i t l 2006 08 10 12 14 16 18 20 12/19 3 6 9 12 3 6 9 u s 1 3 5 7 9 11 1 3 5 7 9 n o C n 2020 2021 o t 2020 2021 s o B y b 1 2 0 2 Strong rebound in demand exacerbates localized bottlenecks in supply chains which have © t h g i r y been strained by pandemic-related production interruptions creating acute pain for some p o 13 C Source: Census, BEA, NBER, BCG

2.3 Inflation: Key question for 2022 is whether inflation is a transitory spike or a structural inflection Transitory inflation spike (post-WWII bottlenecks): Driven Structural regime inflection (60s-70s): Years of tight economy by reopening and bottlenecked consumer economy and sustained policy errors permanently shifted inflation up 0 2. n o i s r Headline inflation (Y/Y) Headline inflation % (Y/Y) e 1 V 202 25 Post-WWII 25 r e b o t readjustment c 25 O 20 20 ed t a d p u es v i 15 Korean 15 t ec p s War squeeze er P e v i t 10 10 u ec x E G C B . ed 5 5 v er es r s t h g i r l 0 0 l A . p u o r G g n -5 -5 i t l u 1945 1950 1955 1960 1965 1960 1965 1970 1975 1980 s n o C n o t s Analogy highlights transient pressures related to Analogy highlights slow-motion breaking of inflation o B y b 1 systemic bottlenecks and consumption surge regime related to tightness and policy errors 2 0 2 © Movement is up and down but not a structural inflection Movement is up and up with ever-higher lows t h g i r y p o 14 C Source: BLS, BCG

If month-over-month inflation remains contained, the first opportunity for 2.3 year-over-year decline is April 2022, given base effects. Will it happen? Know the mechanics and drivers of Y/Y elevated but M/M not—focus on month-over-month evolution each inflation print 0 2. n o i s r e 1 V 2 202 Inflation (%) r e b o t Month-over-month inflation has c 25 O 14 been contained, highlighting that ed t a d 12 p year-on-year prints are driven by base u es v i 1 1M annualized change t effects 10 ec p s er 3M annualized change P e v 8 i t Year-over-year prints must stay u ec 6M annualized change x 6 E high until at least April and May of G C B . ed 2022, which is the first opportunity to 4 12M annualized change v er es roll out of high base effects of April r s 2 t h g i r and May of current year l l A 0 . p u o r G g -2 n I f mont h-over-month remains at i t l u s n current levels until then, year over -4 o C n o 1 3 5 7 9 t year inflation would fall by May 2022 1 3 5 7 9 11 1 3 5 7 9 11 s -6 o B 2020 y 2019 2021 b 1 2 0 2 © t h g i r y p o 1. Base effect refers to the impact of the corresponding “base” or period of the previous year on current growth estimates (e.g., during 2020 low core CPI); 2. Based on Core CPI C Source: BLS, BCG 1515

2.3 Evidence of broad-based inflation continues to be scant as a small number of items—not the whole price basket—are driving inflation prints Broad-based measure (median inflation) not spiking …caused by afew reopening-related consumption higher, despite surges in headline inflation… categories 0 2. n o i s r e 1 V Two-thirds of inflation driven by COVID-sensitive sectors 202 r Raw inflation figure Captures only the center of CPI e b o 1 t (all items) basket used to calculate inflation that account for ~17% of the CPI basket c 25 O Y/Y change ed t 100% 100% a d p 6% Headline u es v i CPI t ec 5% p 34% Other s er Median P e v 4% i t CPI u Car rental ec x 3% 3% E Auto insurance G 5% C 83% B 5% . 2% Hotels ed v 6% er Airfare es r 1% s t h 16% Energy g i r l 0% l A . 4% New cars p u o r -1% G g n i t 2% l u -2% <1% 27% Used cars s n 7% o C 4% n o t -3% 3% s o B 2000 2005 2010 2015 2020 2 2 y CPI basket weights Contribution to inflation (%) b 1 2 0 2 © t h g i r y p 1. The median CPI excludes all price changes except for the one in the center of the distribution of price changes, where theprice changes are ranked from lowest to highest (or most negative to most positive); 2. Average o March, April, May 2020; 16 C Source: Bloomberg, BLS, Federal Reserve Bank of Cleveland, BCG.

Policy should normalize in an orderly way—but if inflation starts to look 2.4 structural, policy makers would tighten faster to prevent a structural break Monetary policy is set to tighten - but very gradually If the Fed turns out to be wrong about transitory inflation, it will need to tighten policy faster, which would upset 0 2. n o i markets and could even risk the cycle s r e 1 V 202 r e b o t Market-implied path of policy interest rate (%) c 25 O Soft and gradual exit from ultra-low rates expected by ed 3.0 t a market and Fed as inflation thought to be transitory d p Fed's view of neutral rate u es v i 2.5 t ec p s er P 2.0 e v i If inflation proves not to be transitory, the pace of t u ec x 1.5 tightening will quicken to contain the risk of a structural E G C B break of inflation regime . ed 1.0 v er es r s t h g i 0.5 r l This would rapidly tighten financial conditions and l A . p u disrupt financial markets, threatening the economic expansion o 0.0 r G g 2022 23 24 25 26 27 28 29 30 31 n i t l u s n o C n o Risk of “policy error” is up—could either be to tighten too t s o B Market pricing of the Fed’s rate path does not exhibit expectation of soon or too much (triggering recession) or policy inaction y b 1 2 spiraling inflation 0 (risk of regime break) 2 © t h g i r y p o 17 C Source: Federal Reserve Board, Bloomberg, BCG

Recent macroeconomics publications by BCG 0 2. n o i s r e 1 V 202 r e b o t c 25 O ed t a d p u es v i t ec p s er P e v i t u ec x E G C B . ed v er es r s t h g i r l l A . p u o r G g n i t l u s n o C n o t s o B y b 1 2 0 2 © t h g i r y p Click here to read past editions of Executive Perspectives o 18 C