Dive into the intricate stages of the supply shock that's reshaping the global economy.
The global economy exhibits signs of economic and financial instability, raising questions about the stages of the ongoing supply shock. Understanding the progression through the three stages of a supply shock—upside, transition, and new equilibrium—is crucial for anticipating future economic scenarios.
Initially, supply shocks present an upside that resembles inflation and can be mistaken for prosperity. However, this prosperity is largely artificial and fueled by government interventions that boost demand beyond what the constrained supply can service, leading to sharp price increases. This imbalance is not the result of money printing but a mismatch between supply and demand.
The transition phase surfaces as the effects of artificial demand wane and the search for a stable equilibrium begins. This stage is characterized by instability and increasing problems due to differing perceptions of the economy's health and direction. Financial imbalances, including those in real estate and stock prices, contribute to this instability.
The third stage involves reaching a new equilibrium, which is heavily influenced by the scale of initial imbalances and how they were addressed during the transition. The process of finding this equilibrium can be disorderly, particularly if the reversion to a fundamental baseline involves significant adjustments.
Data on total business sales and inventories provide insight into the supply shock's progression. After artificial boosts in demand led to a surge in business sales through 2021 into 2022, a slowdown became evident as high prices, exacerbated by events like the Russian invasion of Ukraine, strained the economy. As the transition stage unfolded, nominal and real business sales peaked and began to decline, signaling the start of a reversion process.
The disparity between actual full-time employment and expected job growth underscores the economy's deviation from its potential. As of February 2024, full-time employment is significantly below the trendline established post-2008. This gap suggests a substantial reduction in the economy's income potential, necessitating a shift towards an equilibrium supported by earned income rather than government transfers.
The evidence points towards the economy still navigating the second stage, with potential indications of the third stage's onset. The reversion to equilibrium may entail further job losses and adjustments in various sectors, reflecting the reality of a labor market that has not fully recovered. International economic slowdowns and potential recessions in countries like Germany, Europe, and Japan signal the broad impact of the supply shock.
The global economy is in the midst of a supply shock, transitioning from artificial demand-driven growth towards a new equilibrium based on fundamental economic realities. The process is marked by instability and requires significant adjustments, particularly in the labor market. Monitoring key economic indicators and understanding the stages of the supply shock are essential for navigating the challenges ahead.
