The Global Inventory Overhang / Recession Risk

The prospects for the world at the beginning of this year were once again over-hyped and overall aggregate demand trends have under delivered. For example, it was forecast that there would be a revival in US, Japanese and even European capital spending, however this hasn’t occurred with the result that inventory ratios have risen sharply. These high inventories ratios plus continuing weak global trade imply that many of the affected countries will need to experience actual falls in inventories. However, achieving a fall in the absolute level of inventories will tend to weaken overall GDP data, and impact the IP data possible quite significantly. Moreover, the need for so many countries to reduce inventories through production cuts and strong price discounting represents a considerable deflationary risk with global goods markets, leading to weak inflation trends in much of the world. Interestingly, Europe doesn’t seem to be affected by inventory overhang at present however we wonder if the disposal of some of the continent’s inventories were facilitated by the soft Euro policy.
Blog by Sophie