How does pent up demand build up?
Since the recent rally in the stock markets, we have heard this term quite a lot from different sources like analysts, news anchors, etc. In this blog, we will discuss what exactly is pent up demand.
What is pent up demand? How it is built up?
- These days we see that many market participants are attributing the rally in Indian stock markets to revival of pent up demand.
- Whenever economies go through downfalls like recessions, depression or lock-down in recent times, consumers tend to defer non-essential purchases and save costs. This results in lower demand.
- When the economy starts reviving from the recent downfall, consumers gain confidence and again resort to spending which they had deferred before. This leads to unleashing of the demand that was trapped earlier because of recession.
- This pent up demand is mainly related to discretionary spending rather than non-discretionary spending.
What is discretionary and non-discretionary spending?
- Non-discretionary spending mainly includes need based expense. These are the expenses that are essential to run a household/ business and cannot be deferred or avoided.
- Examples of non-discretionary expenses are household expenses like rent, electricity bill, food costs, etc.
- Discretionary spending, on other hand, are the expenses without which households and businesses can get by. These expenses are often on things that one “wants” rather than one “needs” and hence can be deferred or avoided.
- Examples of discretionary spending include vacation costs, expenditure on luxury items, etc.
In the recent times, which sectors are showing signs of pent up demand?
- Automobile sector – Due to social distancing during COVID-19, consumers prefer personal mobility . Hence, entry level segment in 4-wheeler and 2-wheeler are seeing good traction. Also, due to favorable rain forecasts and good rabi season, tractors are seeing demand revival.
- Consumer goods sector – Due to shift to “work from home” culture and shortage of domestic help, consumer goods like dishwashers, washing machines, etc are seeing good signs of unleashing of trapped demand.
Recently, we can see signs of pent up demand being released as economy is opening up. However, for economic recovery, it is important that this demand remains for a longer time horizon.