As Covid-19 spread around the world this spring and governments locked down their economies to slow the virus, both advanced and emerging-market economies suffered greatly. These lockdowns prevented nonessential businesses—such as restaurants, barbershops, and sports and arts venues—from opening their doors for an indeterminate period of time. They also prohibited many employees from traveling to work, even if working from home was not an option. As a result, a large swath of businesses, including many factories, were not able to operate.

This created a supply-side shock, as products and services could not be produced. On top of that, demand fell as workers lost their income and economic uncertainty climbed. Precautionary savings rose. Consumption fell. Businesses, facing lower demand and higher uncertainty, reduced capital expenditures. Falling equity prices exacerbated the situation, restricting financing opportunities. Indeed, even demand for many products and services that could still be produced in lockdown fell precipitously.