The authors are economists from Shinhan Investment Corp. They can be contacted at [email protected] — Ed.
Strong pent-up demand amid growing recession fears
Concerns about the economic recession are resurfacing in the financial market due to: 1) sharp increases in inflation and interest charges which are weighing on purchasing power; and 2) faster monetary tightening hurting economic sentiment. On the other hand, real economic indicators are showing resilience in the face of growing recession fears, with the large savings accumulated during the COVID-19 pandemic materializing in the form of pent-up demand.
Concentration of demand on certain items distorts growth and inflation
High levels of household wealth accumulated during the pandemic have supported lower consumption, but pent-up demand has been limited to certain goods and services. Consumer spending, which was focused on durable goods just after the pandemic outbreak, expanded to include face-to-face services from 2H21. Consumption fell for other goods and services.
A short-term spike in demand for certain items amid low inventory levels added to inflationary pressure. The main driver of inflation shifted from durable goods to face-to-face services from late 2021.
The gap between current economic conditions and the outlook will persist until pent-up demand eases midway through 4Q22
The gap between current economic conditions and the outlook is due to pent-up demand. While aggregate demand is currently strong, the concentration of consumer spending on certain goods and services has pushed prices higher, forcing central banks to step up monetary tightening and, as a result, paint a bleak outlook. We expect the consumption mix to return to pre-pandemic normal by the end of 2022. Uncertainty in financial markets is likely to persist given the gap between current and future economic conditions and growing fears of monetary tightening, likely until pent-up demand subsides around mid-2022. 4Q22.