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Coronavirus and the global economy

In this podcast Brian Blackstone chats to Credit Suisse chief economist James Sweeney about the effects of the coronavirus pandemic on the global economy.

Measures of the global economy will likely display a "V" shape later this year, but that does not mean it is poised for a robust rebound from the COVID-19 shock.

"But that V is for vacuous. What we want to know is the damage done during that big shock, and how does the nature of the shock change how the recovery will unfold later," Sweeney said.

Governments and central banks have stepped up in recent weeks with large-scale stimulus through interest-rate cuts, bond purchases, and public spending to cushion the blow. However, that will not be enough to avoid steep drops in gross domestic product in the coming months.

"This shock is a massive disruption of normal payment flows in the economy. Real people and real businesses have payments to make and rent to pay and deadlines to meet," Sweeney said. "Fiscal and monetary policy measures are using the tools of war finance to essentially print money and increase government debt so that as few of those payments by the household sector and by the private sector generally can be disrupted by this shock."

Sweeney expects the U.S. economy to contract in the 10-15% range in the second quarter while Europe will possibly fare even worse. One reason: the world economy faces shocks to both supply and demand at the same time.

"If the government orders certain forms of economic activity whether it's factories or restaurants to temporarily shut down, that's essentially a supply shock. If at the same time existing businesses and households choose not to spend money, not to invest or buy big ticket items, that's a demand shock," Sweeney said.

The globalized nature of economies is another complication, because many manufactured products require inputs from around the world, meaning that disruptions in one country could affect the whole supply chain.

"A lot of manufacturers aren't producing a finished good, they're producing an intermediate good," Sweeney said. "If you're building a car and there's some component and you can't get the component, you can't finish the car."

There is, however, one nugget of good news amid the drumbeat of downbeat reports on the global economy. The steep drops expected in second quarter GDP in the U.S. and elsewhere are unlikely to repeated in the third quarter, Sweeney said