Double punch from the coronavirus to the global economy: Twin supply and demand shock

The epidemic has hit the production capacity of goods and services, as Chinese companies remain closed and employees are at home. Thus, while the production of goods stops, the companies are deprived of the substances they need to continue their own activities.

This supply shock was initially seen as a short-term breakdown that could be corrected once the virus was brought under control. It was thought that global growth would decrease in the first quarter and would follow a V-shaped path in which it would jump in the following weeks.

The expectations of 2020 in this direction have now lost meaning with the decline in demand. With the virus not limited to China, anxious consumers are reluctant to shop, travel and eat out. As a result, companies will most likely not only send their employees home, but also reduce their workforce. It will also not invest. This will further increase the blow to consumer spending.

How these two shocks will reflect sparked a debate among economists. This week, Harvard’s Kenneth Rogoff wrote that the inflation shock triggered by a supply constraint similar to that of the 1970s cannot be excluded. The important result for central banks and governments is probably the pressure to support the economy will increase.

David Wilcox, former Fed official from Peterson Institiute for International Economics, said: “It involves more demand cuts compared to a classic recession supply. In this more ordinary case, policy makers know how to fill the missing demand. In this case, however, the situation is more complicated. Because there are negative effects on both supply and demand. ” said.

The simultaneous loss of supply and demand explains why the global economy has been dragged towards its weakest growth since the 2009 recession. Inflation targets of policy makers are becoming increasingly inaccessible. Hyatt Hotels Corp. and United Airlines Holdings Inc. lowered their snow appearance. Manufacturers from Samsung Electronics Co. to Toyota Motor Corp. are also struggling to return to production.