Supply Shock And A Demand Shock Coming Up

Dual economic shocks are underway simultaneously. There are shortages of some things and a lack of demand for others.

Rare Supply-Demand Shocks

Bloomberg has an excellent article on how the Global Economy Is Gripped by Rare Twin Supply-Demand Shock.

The coronavirus is delivering a one-two punch to the world economy, laying it low for months to come and forcing investors to reprice equities and bonds to account for lower company earnings.

From one side, the epidemic is hammering the capacity to produce goods as swathes of Chinese factories remain shuttered and workers housebound. That’s stopping production of goods there and depriving companies elsewhere of the materials they need for their own businesses.

With the virus no longer contained to China, increasingly worried consumers everywhere are reluctant to shop, travel or eat out. As a result, companies are likely not only to send workers home, but to cease hiring or investing -- worsening the hit to spending.

How the two shocks will reverberate has sparked some debate among economists, with Harvard University Professor Kenneth Rogoff writing this week that a 1970s style supply-shortage-induced inflation jolt can’t be ruled out. Others contend another round of weakening inflation is pending.

Some economists argue that what’s happened is mostly a supply side shock, others have highlighted the wallop to demand as well, to the degree that the distinction matters.

Slowest Since the Financial Crisis

(Click on image to enlarge)

Inflationary or Deflationary?

In terms of prices it's a bit of both but mostly the latter.

There's a run on sanitizers, face masks, toilet paper ect. Prices on face masks, if you can find them, have gone up.

But that is dwarfed by the demand shock coming from lack of wages for not working, not traveling, not eating out etc.

The lost wages for 60 million people in China locked in will be a staggering hit alone.

That has also hit Italy. It will soon hit the US.

Next add in the fear from falling markets. People, especially boomers proud of their accounts (and buying cars like mad) will stop doing so It will be sudden.

Bad Timing

COVID-19 comes at a tricky time for the global economy. Take Japan. The Oct sales tax hike saw GDP fall 1.6% q/q in Q4, taking year-over-year growth negative (black). That's a weak base even before factoring in Q1 deterioration in the manufacturing (blue) & services (red) PMIs... pic.twitter.com/iUZwQ1U2LA

— Robin Brooks (@RobinBrooksIIF) March 4, 2020

Stockpiling 

'The stockpiling crisis that has hit supermarkets across Asia has spread to Europe as consumers start hoarding groceries and hygiene products amid fears of a coronavirus pandemic.' https://t.co/uV5OK1zLJj

— Jesse Felder (@jessefelder) March 5, 2020

Deflation Risk Rising 

Like in many other places, Euro zone is vulnerable to COVID-19 because its starting point is so weak. Growth in Q4 was just 0.1% q/q and it's hard to see how 2020 will be much better than 0.5% overall, far below the ECB forecast of 1.1% (as of Dec). Deflation risk is rising... pic.twitter.com/oLUbIKwHLg

— Robin Brooks (@RobinBrooksIIF) March 5, 2020

Another Reason to Avoid Stores - Deflationary 

The COVID-19 shock is likely to accelerate the structural shift away from brick & mortar retail in the US. Growth in core retail sales was already weak through Jan, even before virus anxiety built (top lhs). COVID-19 is, unfortunately, another reason to order online (top rhs)... pic.twitter.com/feu30pC4pW

— Robin Brooks (@RobinBrooksIIF) March 4, 2020

Hugely Deflationary - Weak Demand 

There's a debate if COVID-19 is a supply or demand shock. There's evidence of supply disruption in longer delivery times in manufacturing. But we don't for a second worry that prices will rise, because weak demand swamps all that. Net net: negative demand shock dominates by far. pic.twitter.com/OtyMoJHTDT

— Robin Brooks (@RobinBrooksIIF) March 3, 2020

This was the subject of a Twitter thread last week. I agreed with Robin Brooks' take and di so in advance but I cannot find the thread. 

I did find this.

Well - Not Me
I have been calling for lower and lower yields

People do not understand debt deflation https://t.co/lzrOAq3BPl

— Mike "Mish" Shedlock (@MishGEA) February 27, 2020

Deflation is not really about prices. It's about the value of debt on the books of banks that cannot be paid back by zombie corporations and individuals.

That is what the Fed fears. It takes lower and lower yields to prevent a debt crash. But it is entirely counterproductive and it does not help the consumer, only the asset holders. Fed (global central bank) policy is to blame.

These are the important point all the inflationistas miss.