Brussels’ Clout

The best economic indicators you’ve never heard of, Part 3: Belgian inventories.

Europe is the sick man of the global economy. The continent’s regulation-bound economies have been sputtering for years. The European Central Bank’s most recent survey of professional forecasters predicts 2004 growth of just 1.8 percent. The stubborn refusal of the economies of Europe to grow more rapidly slows demand for American products and puts more pressure on American consumers to stoke the world’s economic engine.

Can Europe recover? Economists and CEOs pray for it every day. But where can they look for signs of a rebound? The broadest measure of economic growth—gross domestic product—is backward-looking. It only tells us what happened in the last quarter. Those interested in determining whether the French and German economies will kick into a higher gear must seek out leading indicators. But the best answer may not be found in Paris or Berlin.

Instead, the search for the world’s best obscure economic indicators leads us to Brussels. AnnaMaria Grimaldi, an economist at Morgan Stanley in London, suggests that Belgian inventory measures can function as a highly useful leading indicator.

“Inventories are a very important component of GDP, especially at turning points,” Grimaldi said. “The reading can be one of the key starting elements of the turning point in the business cycle.” Why? When inventories are insufficient, or low, companies may be more likely to order goods and hence stimulate production. When inventories are excessive, or high, companies will be slower to build up stocks. After a period of sluggish growth, a decline in inventory levels would tend to signal an imminent uptick in activity.

What makes Belgium, with its population of about 10 million, the best place to detect a potential turn in the European economy? It has nothing to do with chocolate or moules frites. The nation that houses the capital of Europe is a very open economy. About 80 percent of its GDP comes from exports, and a large chunk of that goes to European neighbors. In other words, Belgium is a big hub for intra-European trade. “In a sense, a rise in Belgian orders … would signal that domestic demand in other Euroland countries is rising,” said Grimaldi.

In fact, Grimaldi and her colleagues have found that Belgian inventory levels tend to lead broader European levels by three months. So what’s happening in Belgium in March can give us a sense of which direction European inventories will move in June.

So what are Belgian inventories telling us? In September 2003, Belgian inventory levels shifted significantly lower, indicating insufficient inventories in Belgium—good news for future growth. And while the Belgian figures have edged up in recent months, they have nonetheless remained low, suggesting growth ahead. The low readings coming out of Brussels should be good news for Europe. If the historical relationship holds, European inventory levels should fall in the coming months—a phenomenon that will ultimately stimulate economic activity. If Belgian inventories stay in their slump, Europe might even get out of its sickbed one of these days.