Following an economic shock such as a pandemic, we are likely to observe both demand and supply changes. The main shock to the supply side of the economy is that a number of areas of activity may be closed by governments. This limits the availability of inputs into other areas of the economy and as a result a shortage of consumer goods and whilst some sectors may not be directly affected by closure, shut downs in other areas could severely limit productive capacity elsewhere and have knock on effects across a number of supply chains.

There may also be challenges with workers attending work in the case of a pandemic due to self-isolation rules that may be in place or needing to withdraw from work if childcare facilities are closed. Firms may therefore find that they need to cease production and reduce stocks in the interim until the supply chain recovers, which may take some time. If goods are sourced from overseas, the disruption could be highly variable given that governments may take different approaches globally in terms of measures introduced to combat a pandemic.

On the demand side, there is likely to be a fall in consumer and business confidence, due to the uncertainty about the economic future of the economy. From the consumer side, this could be related to concerns about future employment prospects and for firms this might be due to concerns about the future viability of investments and the ability of firms to meet repayment. A fall in confidence will lead to a fall in GDP given the decline in aggregate demand.

In the case of pandemic, we may also expect government spending on healthcare to increase. This can be due to the need to expand healthcare facilities as well as the number of healthcare workers. This may require investment in training and development for the healthcare workforce and securing additional premises either by rental or building new facilities. The government may also provide supply side financial support to research facilities who operate to combat a pandemic, this could be in the area of medication, protective equipment and testing/cure activities.

We may also observe that tax revenue will fall due to a fall in consumer and investor spending. Overall, the government budget deficit will likely rise and this could have long term effects as it would increase the overall government debt. In addition, transfer payments are also likely to rise, given the expectation of a recession and rising levels of unemployment. If a government uses furlough schemes, this would also represent additional fiscal expenditure in an attempt to prevent rising unemployment by supporting firms to keep people employed.

Whilst a recession is generally not associated with demand-pull inflationary pressure, we may observe pockets of price rises due to changes in purchasing behaviours. Concerns about supply, can lead to hoarding behaviour and drive up prices in some key markets (such as food), whereas there has been a fall in the demand for fuel due to lockdown restrictions across the globe.

On the supply side of the economy, we are likely to observe rising costs. Businesses will likely have increased costs due to necessary changes in their operations. This includes adjustment in business premises to accommodate social distancing measures and PPE equipment. These costs could be temporary but may be more likely to occur at repeated points over time where provisions need to be restocked and therefore cause an ongoing shift in the aggregate supply curve.

High levels of unemployment associated with recession may limit the pressure for wage rises as there is spare capacity within the economy. However, if workers anticipate inflation, together with trade unions, they may seek to sustain real wages and create upward cost pressure on firms and further increase inflationary pressure.

Limitations in supply due to the disruption caused by the pandemic could also cause temporary/short term inflationary pressure in some markets, either due to reductions in productive capacity in some markets or due to logistical challenges of getting goods to different locations. Reductions in supply would also put increasing pressures on prices and lead to potential price rises in certain markets.

Interest rates may be lowered in the short run where possible to act as a monetary stimulus as part of the economic recovery and encourage consumer and investor spending. Low interest rates would also discourage international investment if returns were relatively low. If governments engage in Quantitative Easing to stimulate the economy, inflation may result in the longer term. If inflationary pressure does build up within an economy, longer term, we may observe an increase in interest rates as part of a package to curb inflationary pressure.

In the long run, there could be disruption to education if people are unable to participate in schooling/training. This could result in a less skilled workforce in the long run, leading to a less productive future workforce and reduced productive capacity, due to a loss of human capital accumulation (de-skilling of the labour force). This may be compounded by a reduction in R&D (postponed investment effects) with resources being switched to essential services in the short run, leading to reduced technological progress in the longer term.

There is the possibility that the loss of firms in the short run could lead to loss of aggregate supply/loss of output in the long run if productive capacity is not restored by remaining firms or subsequent new entrants. Changes in habits may also prevail which change the demand long term for public services such as transport (with increased flexible working) and some firms (for example, coffee shops/sandwich shops) may experience permanent decreased demand. Likewise, there may be growth in other areas of the economy such as online shopping. Overall, there is a potential for significant structural change and potentially hysteresis.