Coronavirus: Sharp recession but not depression – Capital Economics

FXStreet notes that a collapse in stock markets, co-ordinated policy statements, and emergency interest rate cuts: the events of the past week have inevitably led to comparisons to October 2008. But the differences are as significant as the similarities. Neil Shearing from Capital Economics takes a look at the possible consequences of the crisis. 

“The shock posed by the coronavirus affects both the supply- and the demand-side of the economy. Factory shutdowns, travel bans, supply-chain disruptions, and school closures represent a supply shock – the ability of the economy to produce goods and services is diminished. But fewer trips to shops, restaurants, and cinemas represent a demand shock – consumer spending falls. Large falls in the stock market also feed into weaker demand by reducing household wealth.” 

“These effects can be self-reinforcing since factory shutdowns can reduce the income of workers, which in turn reduces spending”.

“The outlook is unusually uncertain but our sense at this stage is that this is most likely to be a short, sharp shock.”

“The most likely worst-case scenario today is a sharp but probably short recession rather than an outright depression.”