The role of the inventory cycle in the current recovery

Malin Andersson and Gwenaël Le Breton

Economic Bulletin Boxes, 2022, vol. 2

Abstract: This box reviews the inventory cycle in the euro area, which normally is procyclical and notoriously volatile. The annual change in stocks of finished goods in manufacturing, based on PMI data, points to a continued positive inventory contribution to GDP growth in the first quarter of 2022. While fluctuations in this contribution generally reflect adjustments to cyclical changes in supply and demand, the current acceleration in stockbuilding could also reflect a “bullwhip effect”. This occurs where, as a precaution, manufacturing firms tend to hoard inventories of inputs, and at times inflate orders compared with actual needs, when faced with high demand and uncertainty about the supply of inputs. Looking ahead, short-term indicators and evidence from the ECB’s regular dialogue with non-financial companies point to further re-stocking needs, although the pace of such inventory building would depend on the resolution of the prevailing supply-side constraints. JEL Classification: F44, G31, R41

Keywords: business cycle; inventories; supply and congestion (search for similar items in EconPapers)
Date: 2022-03
Note: 427284
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