The paper examines the nexus between inventory investment and the change in aggregate production during the “Great Recession” of 2008/09 for 29 European countries. A fairly uniform pattern emerges. Inventory investment is positively correlated with changes in production and follows the latter with a time-lag of two to three quarters. Very few countries (Austria, Greece, Spain and Switzerland) diverge from the typical pattern. This might hint to problems with respect to data quality.
The literature concerned with the empirics of inventory investment asks, which pattern between inventory investment, production and sales can be found in the data. This research has uncovered a number of stylized facts (see Ramey and West, 1999). First, inventories move procyclically, which means that inventory investment is positively correlated with sales. Second, production is more volatile than sales. These two findings have been confirmed by Blinder and Maccini (1991), Hornstein (1998), Dimelis (2001) and Wen (2005) for the US, by Chikán and Tátrai (2003), Wen (2005), Chikán et al. (2005) and Chikán and Kovács (2009) for OECD countries, by Wilkinson (1989), Christodoulakis et al. (1995) and Dimelis (2001) for EU countries and by Chikán and Horváth (1999) for a group of 88 developed and developing countries. A recent strand of the literature including Carpenter et al. (1998), Guariglia (1999), Brown and Haegler (2004), Bagliano and Sembenelli (2004) and Guariglia and Mateut (2010) rationalizes the procyclicality of inventory investment by linking the depletion of inventories to financing constraints which rise during recessions and become less binding during upswings.
Against the backdrop of this literature, our aim is to examine the nexus between inventory investment and the change in aggregate production for Europe, focusing on the “Great Recession” of 2008/09. This complies with Dimelis' (2001, p. 4) claim that fluctuations of inventory investment become particularly interesting over the contraction of the cycle. Apart from focusing on the recent recession, the paper is novel in two other respects. First, we construct so far unavailable time series for quarterly inventory investment from Eurostat data and second, we look at data for a large sample of 29 European countries—all 27 EU countries plus the two larger EFTA countries Norway and Switzerland instead of zooming in on the major economies as the bulk of the literature has done.
The paper also carries forward earlier work, which was motivated by intelligence we had received that the Swiss Federal Statistical Office (OFS) makes unusually strong hands-on calibrations to the first incoming values from the Statistic on value added, which is the most important data source for the supply-side calculation of GDP in Switzerland. So our earlier research focused on developing plausibility checks for Swiss GDP and productivity growth figures (see for instance Abrahamsen et al., 2005 and Hartwig, 2008). Although such checks cannot prove or disprove the official data, they suggested that official figures understate the true average Swiss labor productivity growth rate by one third. The present paper also aims at contributing to a better understanding of the quality of macroeconomic data, arguing that a striking divergence of single countries from a typical European pattern (provided such a pattern emerges) speaks in favor of low data quality or an inadequate modeling of inventory investment in the respective countries rather than a different behavior of economic agents.
The paper is organized as follows. The next section illustrates the course of production in our 29 countries over the “Great Recession” of 2008/09. In Section 3 we then describe the changes in inventories and investigate whether a typical pattern between changes in production and inventories existed over the recession period. Section 4 concludes the paper.
The “Great Recession” hit European countries with a varying intensity and also the inception of the contraction varied between the first quarter of 2008 and the first quarter of 2009. The five largest economies were hit early, namely in the second quarter of 2008. Depletion of inventories typically lagged two to three quarters behind the contraction of production. In countries that were hit late by recession, the lag was reduced to one quarter.
Over the first one or two quarters of the recession, inventories were typically built up, which yields evidence that over the very short run, inventories are used in order to smooth production. Beyond this very short run, however, inventories move procyclically with production in European countries, which reflects a well-known stylized fact uncovered by inventory investment research.
A small number of countries deflect from the typical pattern. We conjecture that this is due to low data quality or an inadequate modeling of inventory investment in the respective statistical agencies rather than due to a different behavior of economic agents in these countries. Greece and Switzerland record inventory investment figures that move in the opposite direction to those of most other countries. Both countries report a strong inventory buildup during the “Great Recession”. In Austria and Spain, firms have built up inventories for years now according to official data irrespective of economic conditions.
