The Role of Stockbuilding in Recession and Recovery

Extract

Stockbuilding is the component of the expenditure side of the national accounts that reflects the change in the stock of inventories held by firms. Firms maintain a stock of inventories in order to meet short-term demand. Storage of excess stock is costly, so while firms aim to maintain a sufficient level of inventories to meet anticipated demand, they try to avoid excessive inventory accumulation. If sales fail to meet expectations, unsold stock accumulates in warehouses and firms will cancel orders for new inventory until the desired inventory to sales ratio is restored. This can have a significant impact on GDP growth in the short term, and stock adjustment has been cited as an important factor behind the sharp drop in GDP and especially world trade experienced during the recession.