Destocking seen as the main danger

In its Inflation Report, the Bank of England highlighted the risk of destocking as the "main danger" to the outlook for economic activity, writes Paul Wallace.

The US has recently undergone an inventory correction that left growth in gross domestic product virtually flat in the second quarter of the year.

Stocks had been built up in the UK throughout 1994 and the first quarter of 1995.

They rose by pounds 800m in the first quarter of 1995 following a rise of pounds 1.4bn in the final quarter of 1994.

Stocks were less important to firms than in the 1970s and 1980s: the ratio of stocks to output had fallen since about 1980.

However, by the first quarter of 1995, stockbuilding "had on average made about the same contribution to GDP growth as it did in the previous two recoveries". But some of the more recent rise in manufacturers' finished goods and retail stocks "was probably involuntary as domestic demand turned out weaker than expected".

In July the survey by the Confederation of british Industry had pointed to involuntary stockbuilding: manu facturers had built up stocks more than expected in the previous four months and they also expected to cut stocks in the following four.

It was therefore possible that a similar temporary inventory correction to the one that had occurred in the US might also affect the UK.

There was also "a risk that temporary destocking might provoke a more general and prolonged slowdown in the second half of this year".