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Our monthly economic tracker, in association with Platform, provides data on the key indicators of the health of the economy and expert commentary
Firms destock amid weak demand fears
The global economy’s return to growth has been accomplished from a combination of two main drivers. The unprecedented policy response we’ve seen with huge reductions in official interest rates and quantitative easing programmes orchestrated throughout the developed world, successfully stemmed the crisis and created a pronounced global inventory cycle.
As global credit markets seized up last year and trade finance became prohibitively expensive, firms drastically cut back on production and met sales demand from their existing inventories.
While demand clearly suffered at the height of the crisis, a combination of lower interest rates, fiscal support and reduced energy costs helped to stabilise consumer spending through 2009. This has led to a rapid liquidation of inventories. This inventory cycle is remarkably synchronised across the world. By the middle of the year companies could see that production levels were insufficient to meet demand. Unless production increased, inventories were set to become too lean. Subsequently, global trade and production have enjoyed a sharp rebound in activity.
Our calculations suggest that at the start of the Q4 2009, the world was around halfway through the process of bringing production back towards the level of final sales. But, as we head further into 2010, this process of ‘destocking’ (manufacturers reducing their output) should be largely complete. There is a risk that companies may decide to embark on a period of over-production to restock. However, we feel firms will be comfortable holding a lower level of inventories than before the crisis given the fall in demand, caution about the outlook for growth and unwillingness or ability to access credit.
In the UK, we believe we are now approaching the final stage of a ‘square-root’ shaped economic recovery. Following the sharp downturn we saw early in 2009, we believe the sharp bounce back from inventory restocking will begin to fade during 2010 and growth will remain subdued as final demand from consumers remains weak. Given the anaemic outlook for economic growth and the labour market we do not see any significant underlying inflationary pressures building, or any need for the Bank of England to increase official interest rates.
TIM DRAYSON
ECONOMIST
L&G INVESTMENT MANAGEMENT
