Economic Analysis: Pent-up Demand and Financial Market Uncertainty
The authors are economists of Shinhan Investment Corp. They can be reached at keonhyeong.ha@shinhan.com. — Ed.
Strong pent-up demand vs. growing recession fears
Concerns over economic recession are rising again in the financial market due to: 1) steep increases in inflation and interest expenses weighing on purchasing power; and 2) faster monetary tightening hurting economic sentiment. On the other hand, real economic indicators are showing resilience amid mounting recession fears, with large savings built up during the COVID-19 pandemic materializing in the form of pent-up demand.
Concentrated demand on certain items distorts growth and inflation
High levels of household wealth accumulated during the pandemic have provided downside support for consumption, but pent-up demand has been limited to certain goods and services. Consumer spending, which was concentrated on durable goods right after the pandemic outbreak, expanded to include face-to-face services from 2H21. Consumption declined for other goods and services.
A short-term spike in demand for certain items amid low inventory levels has added to inflationary pressure. The main driver for inflation has shifted from durable goods to face-to-face services from end-2021.
Gap between current economic conditions and outlook to remain until pent-up demand tapers off in mid-4Q22
The gap between current economic conditions and outlook is attributable to pent-up demand. While overall demand is currently solid, the concentration of consumer spending on certain products and services has pushed prices higher, causing central banks to speed up monetary tightening and thereby painting a bleak outlook. We believe the consumption mix will return to pre-pandemic normal at the end of 2022. Financial market uncertainty should continue given the gap between current and future economic conditions and growing fears of monetary tightening, probably until pent-up demand tapers off around mid-4Q22.
