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Cyclical Slowdown Driving Deteriorating Sector Outlooks Nearly three quarters of North American sectors maintain a deteriorating outlook for 2023, reflecting our expectations for weaker core credit drivers in these sectors relative to 2022. Inflation, rising rates and tightening lending conditions remain key considerations for North American sector outlooks. Robust 1H23, but Contraction Looms Economic growth was stronger than expected in 1H23, supported by robust employment and consumption, which have been mostly resilient to the rising rate environment. We have raised our 2023 global economic growth forecasts, including for the U.S. to 1.2% from 1.0% and Canada to 1.3% from 0.8%. However, demand indicators are showing signs of slowing, according to our latest Global Economic Outlook. ���������ֳ� still projects that overall growth in North America will slow over the full year with a shallow U.S. recession in 4Q23–1Q24, later than previously forecast, driven by tighter credit conditions, lower savings, reduced business investment and expected negative job growth. The cyclical downturn — evidenced by financial tightening, declining real estate values, higher borrowing and input costs, and weakening consumer profiles — is the principal driver of our deteriorating outlooks for the large majority of North American sectors. There are no midyear changes to our sector outlooks except for U.S. REITs, which moved to deteriorating from neutral. Further tightening of CRE lending conditions amid ongoing valuation pressure and macro headwinds were cited as drivers for the changed outlook. What to Watch – Downside Scenario Risks • Persistent inflation leading to aggressive monetary policy tightening and higher than expected terminal rates. • More severe and prolonged recession than anticipated, with higher unemployment and increased consumer and corporate loan defaults. • Financial market instability, which could be catalyzed by plummeting CRE values or a deepening credit default crisis. The March banking sector stress test revealed deposit vulnerabilities, poor asset/liability management and associated unrealized losses on investment securities. Recession concerns will reduce credit availability in the near term, as will anticipated changes to the bank regulatory framework and lower banking system liquidity resulting from monetary tightening. Financial sector tightening has been most evident in refinancing risk for CRE loans. Leveraged loans/high-yield corporate borrowers are also starting to feel its effects.