As Erik Nielsen, group chief economist at UniCredit Bank, explained in a Sunday note, investors know that efforts by policy makers to stimulate the economy can partly address demand shocks.
But it is “much more complicated, if at all possible” to offset supply shocks, he wrote, offering the following example:
Think of it this way: China has closed a reported 70,000 movie theatres because of the virus. That’s a supply shock, and no amount of income (demand) stimulus will boost ticket sales. Of course, people may increase the number of downloads of films and games to play at home, as we have seen, but this is nothing more than drops in the ocean in terms of the overall economy.
Big, negative supply shocks are rare, Nielsen noted, with the oil shocks of the early and late 1970s offering perhaps the most well-known examples. Other supply shocks would be storms, tsunamis, earthquakes, wars, embargoes, and strikes. The problem is that there’s little that looser monetary policy or additional fiscal stimulus can do to offset the impact because those stimulus measures work by boosting demand.