Interest rate reversal unlikely to result in a recession

Recession from interest rate reversal likely averted

Despite the numerous warnings of a recession, there is little justification for these concerns to date based on the performance of the stock markets and company earnings across the world. Read what the causes of this are and what implications current economic developments have for investors. 

Interest rates, inflation, and the economy – better than their reputation

Based on projections, the global interest rate reversal should have triggered a recession. At least that is what happened after the last comparable interest rate reversal was ushered in by former US Federal Reserve Chairman Paul Volcker in 1979.

There are currently no signs of such a downturn, though: Stock exchanges and corporate profits are not sending any signs of recession yet. One reason it may have been averted could be the technology and productivity boom that the pandemic triggered globally. Additionally, the shortage of skilled workers means higher average incomes, which is encouraging companies to invest in smarter machines, factories, and IT. At the same time, we are witnessing a veritable explosion in artificial intelligence applications that are intended to boost the efficiency of many tasks and processes.

Has inflation peaked?

US Federal Reserve (Fed) Chairman Jerome Powell recently noted that monetary policy is now "restrictive." The interest rate reversal did indeed spark a global downtrend in consumer price inflation. While inflation has not yet reached the target level, it is moving in the right direction – at least in the US, the euro area and Japan.

The decline in inflation offers hope that interest rates have peaked and inflation is approaching stabilization. This and the fact that consumer spending is continuing to bolster the economy in many regions is attributable to strong labor markets, rising productivity and higher wages.

Consumer price inflation is declining in many places

Consumer price inflation is declining in many places

Note: The dotted line denotes the inflation target of 2%.

Source: Haver Analytics, Credit Suisse
Last data point: April 2023

Asia, Latin America and Turkey have their own specific issues

Unlike in industrialized countries, inflation in emerging markets is currently influenced more heavily by individual and independent factors.



Instead of inflation, deflation is an issue in China, for instance. Consumer prices rose by only 0.1 percent year-on-year in April, while producer prices actually slid by 3.6 percent.

Deflation in China 2023

China currently struggling with deflation

Source: China National Bureau of Statistics, Yardeni Research
Last datapoint: April 2023

Unlike its western counterparts, the Chinese central bank has significant leeway to stimulate the economy thanks to stable prices. By lowering the reserve rates for commercial banks, it is successfully encouraging banks to lend: China's bank loans recently rose to USD 3.4 trillion. It is no wonder that consumer spending has become the main pillar of China’s economy. The dynamics of the economy now increasingly resemble those of the industrial nations, where consumption usually accounts for two-thirds of overall economic output.

South-East Asia and Latin America

In South-East Asia and Latin America, infrastructure investments and demand for commodities are fostering economic growth and moderate inflation. Polls of industry representatives and consumers are showing signs of cautious optimism.


Turkey is bringing up the rear far behind the other emerging markets. Its inflation rate of around 45% and the poor economy are of its own making. President Erdogan's re-election sent the country's currency to a new all-time low. Nowadays, it is hard to imagine that one Turkish lira was the equivalent of one Swiss franc in October 2007. It now only buys CHF 0.04. This nearly complete depreciation is hitting the Turkish economy hard. Due to Turkey’s large current account deficit, every loss suffered by the lira adds to the country’s inflation.

Global view: resilience and economic growth

In global terms, industrial production is continuing to grow this year. This is especially true in emerging markets, where there is no shortage of skilled workers and expansionary monetary policy is strengthening the economy. However, it is also rare to hear talk of a “trend reversal” among businesses in the industrialized countries. The structural dynamics will likely remain intact.

There are structural reasons for the resilience of global industrial output. Firstly, many companies are now investing in local and “smart” production, warehousing and equipment. This is often required by industrial policy and intensified by new technological developments.

However, the services business, which accounts for the bulk of demand in rich nations, is actually outperforming manufacturing. Tourism in particular is booming in spite of rising prices. In Europe and the US, the capacity utilization of hotels, flights and cruises is also higher than pre-pandemic levels. All European purchasing managers’ indices (PMI) for services are pointing to growth.

Growth in European services companies

Growth in European services companies

Last data point: May/April 2023
Source: Haver Analytics, Credit Suisse

Rising revenues and earnings per share

Compared to the statistical economic indicators, things look different for revenues, earnings, and dividends: Rising revenues per share around the globe suggest an amazingly robust global economy.

Moreover, earnings per share have also held out against the monetary policy headwinds thus far. This detail is all the more interesting since stock exchanges always follow profits in the long run.

Performance of the most important developed market indices

Performance of the most important developed market indices

Last data point: May 30, 2023

Sources: Haver Analytics, Credit Suisse


Historical performance and financial market scenarios are not reliable indicators of future outcomes. It is not possible to invest in an index. The index returns shown are not the outcomes of actual trades in investable assets or securities. Investors who pursue a strategy aligned with an index may generate lower or higher returns and must take the attendant costs into account.

What does this mean for investors?

Perhaps the most significant conclusion is as follows: “It’s all about staying invested.” In addition, the structural reasons for the astonishing performance by the economy and the markets this year continue to include artificial intelligence, consumer spending, infrastructure expansion, and the Credit Suisse Supertrends i.e. energy transition, security, and sustainability.

US monetary policymakers may raise interest rates once again, but no major surges are expected. The stock markets are already looking ahead to next year. And for its part, Switzerland can once again be recommended to investors as a good location, with an economy that features a balanced blend of sectors, has numerous hidden global champions and, in our view, offers attractive value for money.

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