A critical issue affecting the level of economic growth in the UK in the coming months will be the extent of the pre-Brexit inventory overhang.
The ONS data suggests that from a roughly balanced position where inventories were little higher than might have been expected at the end of 2018, stocks rose by £10 billion in Q1 2019 and fell by £3 billion in Q2.
Cebr’s rough estimate is a £4 billion rise in the four-month period covered by Q3 and October 2019, bringing the level of inventories in the system to about £11 billion above the desired level.
Our evidence for this is based on business surveys, particularly the CBI Monthly Trends Enquiry and the CBI Distributive Trades Survey both of which ask questions directly about inventories.
Inventories in the UK economy are in three main sectors: Manufacturing, Distribution and Services with about £60-65 billion in each. Inventory in the service sector is mainly work in progress and does not get stockpiled so the main variations are in the other two sectors.
The latest CBI Monthly Trends Enquiry indicates that in manufacturing: ‘30% of firms said their present stocks of finished goods were more than adequate, whilst 2% said they were less than adequate, giving a balance of +28% – the highest balance since May 2009’. As manufacturing inventories were cut by £9 billion in real terms in 2009, this suggests the prospect of heavy manufacturing destocking.
The latest CBI Distributive Trades Survey indicates a very sharp rise in wholesale activity in September which would normally imply restocking ‘Wholesale volumes increased in the year to September (+21%), following a sharp decline the previous month (-25%), with orders following suit (+21% from -9% in August).’
On past relationships, this suggests that by the end of October inventories will be around £11 billion higher than would be held normally. Even with a Brexit deal, it should not be assumed therefore that the economy will automatically recover. Not only is the international economy weak but the inventory overhang will have to be run down before growth can resume.
Contact: Douglas McWilliams firstname.lastname@example.org phone: 07710 083652