The economic implications of coronavirus

But he noted that a demand shock didn’t happen in the UK economy in the immediate aftermath of the Brexit vote, as  consumers continued to spend, and he said it is for this reason the UK economy performed better in the immediate aftermath of the vote than the bank had predicted. 

This is because while a supply shock to the economy can have profound long-term impacts, the short term problems are relatively easy to solve (by cutting interest rates or otherwise pumping cash into the system), unless accompanied by a demand shock.

A demand shock in an economy happens when individuals and companies reduce their consumption, either because their income drops, or because they fear their income will drop in future and so begin saving now.

The great economist John Maynard Keynes prescribed the solution to a demand shock in the economy as being for the government to spend money, and increase demand for goods and services. 

The Eurozone sovereign debt crisis was a supply side problem, as banks were struggling to lend.

The demand side issues were that many Eurozone economies have ageing populations, and older people are far less likely to spend extra cash than younger people, while the Eurozone restricts how much individual member states can borrow, preventing governments from providing extra demand.     

Mario Draghi’s “whatever it takes” measures involved making credit easier to access and so addressed the supply side.

But Eurozone economic growth has been tepid since 2011, as the demand side didn’t recover, as it did in the UK and US, where governments were able to run heartier budget demands to prop up demand.

The business rate holiday for the leisure, hospitality and retail sectors will be welcome but these areas of the economy have already been under strain.--Edward Park

The global financial crisis was a demand side issue, caused by a collapse in the supply of money via the banking system.

Policy makers embraced a supply side solution, by recapitalising the banks, and restarting the flow of money, and a demand side problem (which can usually be seen in terms of much higher unemployment) never materialised. 

That supply side solutions can provide a short-term boost, but create long-term problems, can be seen in the tepid level of growth in the UK and US since the financial crisis. 

The Coronavuirus crisis is large enough that supply side solutions alone will not work.

Increasing the ability of banks to lend does not work if people cannot get to the shops to buy the goods the extra credit has given them the power to buy, or the businesses the power to supply.