Rise in stocks ratio deepens concern over growth

PAUL WALLACE

Economics Editor

The ratio of retail stocks to retail sales rose in the third quarter to its highest on record, reinforcing concerns that the economic growth might peter out in the next few months as demand is met from inventories.

Investors, however, brushed the concerns to one side. The stock market had a good day in thin trading, with the FT-SE 100 index rising 25 points to close at 3,658.3.

New figures released by the Central Statistical Office cast light on the big build-up in inventories in the third quarter of 1995. The ratio of retail stocks to retail sales, expressed as an index, rose sharply from 105.3 to 106.8, its highest since the series started in 1980. This followed a sharp upward revision to the increase in retail inventories from an initial estimate of pounds 94m to pounds 221m.

The worry now is that an attempt to shake off excess inventories by retailers will work its way down the line to manufacturing. The CSO revealed that the third-quarter increase in manufacturing stocks of pounds 769m, the highest since the fourth quarter of 1988, was concentrated in three sectors, engineering, chemicals, and paper, rubber and plastics.

At pounds 292m, the actual increase was largest in the engineering sector. But relative to the level of stocks held, it was biggest in the chemicals and paper sectors.

New information provided by the national accounts on Thursday suggested that the build-up in manufacturing inventories might have been intentional, rather than involuntary as has generally been thought. Most of the increase was in materials and fuels and work in progress rather than in finished goods. Of the pounds 769m rise, pounds 201m was in finished goods and the remaining pounds 568m was further down the pipeline.

Adam Cole, UK economist at James Capel, said this showed that the increase in stocks was voluntary. The sharp increase in input prices earlier in the year led firms to increase their inventories. In chemicals and engineering, firms seem to have assumed that sharp rises in the prices of raw materials would continue in the second half of this year and built up substantial stocks as a result."

The continuing build-up in inventories in the third quarter in the paper sector - where the rate of input inflation remained particularly high - seems to add weight to this view.

However, as Mr Cole says, "just because stockbuilding in the first three quarters of this year was voluntary at the time does not mean that it is not a cause for concern now." He expects destocking to reduce growth in the first half of next year by close to 0.5 per cent.

The CSO also revealed that capital expenditure by manufacturers rose 2 per cent in the third quarter and was 12 per cent higher on an annual basis, with plant and machinery investment up by 15 per cent. The rise in capital spending was concentrated in the fuels and oil refining sector and engineering. There was a fall in investment in the food, tobacco, textiles and wood sector.