Supply shock and falling demand: The case of the COVID crisis

The euro-zone economy has just suffered a major negative supply shock due to the COVID crisis, first as a result of the lockdown of populations and then the lasting problems of certain business sectors and the loss of productive and human capital. But it is possible that a negative supply shock may eventually lead to a decline in demand that exceeds the decline in supply. If economic agents expect production to fall in the future, expected income and wealth will fall, and demand will therefore fall. If, ex ante , this outweighs the fall in production caused by the negative supply shock, although there is such a shock, demand-stimulating economic policies will have to be implemented.