The major shocks the world has experienced over the past six years, from the Covid pandemic and the war in Ukraine to trade tensions over tariffs and the geopolitical conflict in the Middle East, are all related to the supply side of the economy. 

The same is true of several structural trends shaping the future, commonly referred to as megatrends, including demographic change, climate change, geofragmentation and new technologies such as AI. This suggests that the global economy is moving from a traditionally demand-driven environment towards a more supply-driven one.

This shift matters because supply shocks create a particularly difficult trade-off for economic policy. A negative supply shock can simultaneously weaken economic activity and increase inflation, leading to stagflation. 

Traditional fiscal and monetary policies are not well suited to addressing both problems at the same time: supporting growth may add to inflationary pressures, while fighting inflation may further weaken economic activity. Ultimately, a lasting solution requires supply itself to recover.

So far, governments and central banks have largely responded to these shocks with traditional demand-side policies. Fiscal support has helped cushion the impact on activity, while monetary policy has alternated between strong stimulus and tightening as inflation increased. 

Although the global economy has proved more resilient than expected, repeated shocks have left it with weaker buffers, including higher public debt, larger central bank balance sheets and less fiscal policy space.

Looking ahead, economic policy will therefore need to focus not only on managing demand but also on strengthening supply. This means boosting productivity and investment, promoting technological innovation, improving skills and labour-force adaptability, and developing effective industrial and energy policies. AI could itself provide a significant positive supply shock through higher productivity. 

The key challenge will be to make economies more resilient and expand their productive capacity while preserving medium-term fiscal and economic sustainability.