In this week’s EconMinute, we’re talking about business inventories.
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Changes in business inventories can be an important indicator of future economic activity. Falling inventory levels is a sign that an economy is heating up because demand is outstripping supply and output levels may need to increase. Conversely, rising inventories can signal slowing demand.
Importantly, rising inventories can also help stem inflation. If companies have a lot of stockpiled goods, they may start to cut prices or offer discounts to move their stock.
Here’s what the data show about business inventories in Canada:
- In Q2 of this year, rising business inventories was the single largest contributor to Canadian GDP growth. Overall investment in inventories was the highest it has been in decades.
- In the manufacturing sector, inventories began to fall soon after COVID hit and did not start growing again until December 2021.
- From June through August of this year, year-over-year manufacturing inventories have been growing at double-digit rates.
- About half the total increase has been in inventories of raw materials. However, inventories of goods under production and finished goods are rising as well.
To some degree, inventory growth represents companies replenishing their stocks after drawing them down during the pandemic; as well as insulating themselves against ongoing supply chain uncertainty. However, as inventories continue to rise, we may start seeing downward pressure on goods prices and lower production levels, signalling slowing economic growth in Canada.