Geoff Riley Eton College
Stock Clearance and the Economic Cycle
A short stroll down any high street in the UK at
the moment will reveal retailers large and small
resorting to deep price discounts to shift unsold
stock. From booksellers to clothing stores and
from the car showrooms to travel agents, this is
the age of the super-discount as retailers and
recession-battered consumers engage in a battle
of wills. Who will blink first?
The need for hefty price cuts is obvious and reflects
unexpectedly weak demand across many sectors
of the economy. Car manufacturers are temporarily
stopping production (some plants will close altogether)
and there are many thousands of other businesses
making tough decisions on how to control costs and
conserve and improve cash flow. Little else seems to
matter in the struggle to survive this bitter and deep
recession.
Turning points in the economic cycle
Students of macroeconomics should pay close
attention to the published data on stocks for they
tell us much about demand-side turning points in
the economic cycle.
Consider the accompanying chart tracking the annual
growth of real GDP together with the quarterly
change in the real value of stocks of finished goods
and work in progress. It is clear that in the final three
months of 2008 there was a sharp decline in
stockbuilding – of the overall £5.9bn fall in GDP
of about £2.7bn. This was achieved by short-term
cutbacks in production and explains much of the
recorded fall in GDP of 1.5% in the final quarter.
Businesses were deciding that, with consumer
spending falling by 0.7% in the final months of the
year, stocks had to be trimmed to match falling
demand so that they were not left with an expensive
overhang of products that can only be shifted by
slashing prices.
This process is known as de-stocking and it helps
to explain how a slowdown can become a full-blown
recession – especially when it is done on the scale
that we are seeing in the UK at present.
It is also a reason for expecting price deflation in
the second half of 2009 since we can expect the
steep price cuts to be reflected in the RPI and CPI
inflation data in the next few months.
Whilst in the short term cutting production by reducing
the number of shifts or mothballing factories will
make the recession worse, a favourable interpretation
of the data argues that these measures will leave
businesses better placed to weather a downturn that
none of us knows how long it will last. If demand
starts to rebound in the second half of 2009 or early
in 2010, the stock cycle will take another twist and
aid the recovery process.
But for the moment the sharp fall in stocks is a
reflection of an economy that is locked into reverse
gear. Supply chain businesses are suffering because
a contraction of output inevitably leads to weaker
order books for components and raw materials. In
Birmingham for example, close to the heart of the
UK volume car manufacturing industry, it is estimated
that 20 per cent of the local car industry's supply
chain staff are already either on short-time working
or have already been laid off.