The view here remains that the global stockbuilding or inventory cycle is bottoming in H2 2019, i.e. the impact of the cycle on global growth is about to shift from headwind to tailwind.

There is much confusion about this cycle. Inventory levels are still elevated, as evidenced, for example, by the business inventories to sales ratio in the US and a high proportion of Euroland firms reporting above-normal stocks. The consensus argues that production will be cut back to reduce the excess, depressing growth.

The growth impact of the cycle, however, depends not on whether inventories are rising or falling but whether they are doing so at a faster or slower pace. High inventories are usually associated with a rapid near-term rate of reduction. Soon after the peak, the pace starts to slow. The growth impact then moves from negative to positive, even though inventories are still above normal and may continue to decline for many more months.

Hard information on inventories is patchy, delayed and often revised significantly. A G7 survey-based indicator is used here to track the cycle and, as previously discussed, has reached a level consistent with a low.

An alternative, indirect way of monitoring the cycle relies on the tendency of firms to use short-term bank credit to finance inventory increases. In the US, banks’ commercial and industrial (C&I) loans surged in late 2018 / early 2019 when inventory accumulation was peaking but growth has since slumped – see first chart.

The annual change in three-month growth of C&I loans correlates with the impact of stockbuilding on the annual rate of change of GDP – second chart. The relationship suggests a significant negative contribution to annual GDP growth in Q3 2019, consistent with the cycle moving into a low.

One implication of a bottoming of the global stockbuilding cycle is that industrial commodity prices are likely to strengthen in 2020. The copper price, for example, has tended to weaken into cycle lows but pick up in the subsequent year – third chart.

The oil price has been depressed by rising US production as well as a weak global economy. Investment in new wells, however, appears to have fallen sharply in Q3, judging from industrial output data on well drilling – fourth chart. This could result in a decline in output in 2020, adding to upward pressure on the oil price from a turn in the stockbuilding cycle.