Euler Hermes Rating publishes study "Painful destocking in sight for European corporates"

Key findings

  • European companies have witnessed an unusual accumulation of stocks since mid-2018. In March 2019, the Eurozone’s inventories to new orders ratio, based on the Manufacturing PMI, hit a new peak, the highest level since the crisis of 2012 and higher than anywhere else in the world.
  • For large companies in the Eurozone manufacturing sector, the average Days Inventory Outstanding (DIO), a measure of how long it takes on average for a company to turn its inventory into sales, increased by four days to 52 days in 2018, compared to 2017. The highest increases were seen in Spain (+11 days) and Germany (+6 days). For Eurozone SMEs in the sector, DIOs increased by four days to 58 days, with the largest rises registered in Italy (+9 days) and Germany (+6 days).
  • Large manufacturing companies tend to be more integrated in the global supply chain and more exposed to external trade, which has significantly slowed down since the start of the year. We find that global uncertainty has been a positive contributor to inventory building in the Eurozone since Q3 2018 while frontloading activities have also pushed inventories higher as demand proved to be weaker than expected. These two factors explain almost 30% of the increase.
  • The unusually high level of inventories calls for a downside adjustment in production and prices. Indeed, European companies in the manufacturing sector surveyed in June 2019 assessed the level of stocks as “being too large”. We estimate that the level of inventories is currently between 20% and 30% above what could be considered as being a normal level.
  • Based on the amplitude of this “positive shock” of inventories, we estimate a VaR model, which shows that the current deviation of inventory-to-orders ratio from its average would drive inflation rate down by -0.2pp in 2019 and by -0.1pp in 2020. In addition, inventories are likely to subtract -0.3pp from Eurozone GDP growth in 2019 (to +1.2%) before a catch-up in 2020 (+0.1pp).