>GLOBAL MARKET RESEARCH (DANSKE MARKETS)

Global: historic inventory cycle to boost growth

• A key factor behind our above-consensus global growth forecast is our view on the inventory cycle. Our thesis is that, even if the demand recovery is slow during 2009, we will still see a significant production rebound in H2 09.

• This is the main difference between our forecast and, for example, those of OECD and IMF, which predict a considerably slower and later recovery.

• The inventory cycle is a very important cyclical driver and in this downturn it has been much more forceful than we have seen historically.

• Production has been cut at a record pace in order to deplete inventories. However, with inventories lean, production substantially below demand and demand rising due to massive stimulus, we believe the ground is laid for a rapid production rebound in H2 09.

• It is important to note that inventories will continue to fall in H2 09 even as production rises. Hence it is not a case of rebuilding of inventories but a case of aligning production with demand.

• We already see recovery in Japan and other Asian countries and we expect to see it soon in US and Europe. The auto sector should be a prime example of this.

Since the beginning of the year we have argued that the strong force of the inventory cycle in this downturn would lay the ground for a manufacturing recovery during 2009 (see Research – US: Manufacturing recovery ahead, Jan 09). We have already seen signs that this is materialising, in surveys such as ISM and leading indicators, but we believe the story has further to run. Hence we expect ISM and global leading indicators to continue to surprise on the upside. Importantly we should also start to see improvement in the hard data over the coming quarters. This is about six months earlier than, for example, OECD and IMF are predicting; they also forecast a much slower recovery. We don’t disagree that the recovery in demand will be slow as headwinds linger for a long time due to the financial crisis and wealth destruction. However, that does not mean we don’t see a strong rebound in production.

See inside:

• Production - demand = change in inventory
• Further ISM increases in the pipeline
• Euroland production should also recover
• Bottom line: global production to rise in H2, perhaps strongly

To see full report: MARKET RESEARCH