Threat to global growth from rising inventories

Instead, what has happened in reality is that households have devoted more of their cash and current incomes to ‘saving’ in the housing market and this has resulted not in a pickup in retail spending but the reverse. Indeed, compared to their previously quite well established post GFC trend, US retail sales seem to have been notably soft this year.

Elsewhere, while it is perhaps true that UK households have indeed ‘done their bit’ to raise global consumption, Germany’s much forecasted consumer recovery seems to have fizzled out now that the immediate impact of the lower oil prices has faded. France’s retail data has been a little better over recent months (and we suspect that it may improve further following the recent tragic events – 9/11 was followed by three months of very strong retail spending trends) and both Italy and Spain have recently witnessed some improvement but Japan’s consumer has largely failed to turn up this year. Faced with falling real yields and growing uncertainty over their pensions, Japan’s households seem to have decided to attempt to save even more of their (weak) income streams. Meanwhile, trends in LATAM have been soft and, despite the ever optimistic officially-sanctioned economic data from China, we suspect that household spending trends across the bulk of Asia are in reality very weak at present. Consequently, 2015 has not witnessed the type of consumer-driven growth that was so confidently predicted by so many at the beginning of the year. 

Of course, the other ‘big thing’ that was supposed to happen in 2015 was a revival in US, Japanese and even European capital spending. This plainly has also not occurred and hence there has been very little with the rest of the world’s corporate spending trends to offset the (albeit more widely anticipated) weaker trend in EM capital expenditure trends. 

As a consequence of these ‘final demand’ failures, it is clear that the bulk of world’s producers have certainly not experienced the type of world – or more particularly the growth in sales receipts – that they were apparently so confidently expecting at the outset of the year. In short, the prospects for the world were yet again over-hyped and once again overall aggregate demand trends have under delivered but on this occasion the impact on companies appears to have been very significant. A few weeks ago, there was a marked tendency visible within financial market circles to ‘explain away’ the US’s notionally weak Q3 GDP report because the inventory term was lower than expected – i.e. investment in inventories was somewhat lower than expected. However, we would argue that this interpretation completely missed the point that despite the apparently weak level of inventory building over the third quarter, inventory to sales ratios rose in the retail, wholesale and even manufacturing sectors. Crucially, we find that the upward drift in inventory ratios seems to have started almost as soon as US retail spending begun to track below its post GFC time trend and the European Central Bank adopted its weaker Euro policy.