RDP 2013-13: Inventory Investment in Australia and the Global Financial Crisis 7. Conclusion

A sharp decline in inventory investment was an important contributor to the 2008/09 slowdown in Australia. I identify the extent to which this was due to a tightening in credit conditions as opposed to a fall in actual, or expected, demand.

Industry-level analysis also indicates that a large fall in motor vehicle inventories contributed to the big decline in aggregate inventories. Based on a case study of the domestic motor vehicle industry, I find suggestive evidence that indicates the withdrawal of two large international finance companies had an adverse effect on credit supply and, subsequently, motor vehicle inventory investment.

Looking across a range of industries, and using the pre-crisis variation in the debt maturity structure of Australian listed companies as a proxy for credit constraints, I find that companies that were forced to refinance or repay a relatively large share of debt in 2008/09 reduced inventory investment by significantly more than companies that were due to refinance or repay their debt at some other time.

But, potentially arguing against a causal interpretation, the link between debt maturity and inventory investment is particularly pronounced for firms that had a relatively large share of short-term revolving credit due in 2008/09. This suggests an alternative explanation for the observed link between debt maturity and inventory investment; as economic conditions deteriorated and firms became concerned about the outlook, they chose to reduce inventories and draw down their existing debt capacity in order to remain solvent. In other words, the sharp decline in inventory investment was due to firms becoming credit constrained but this reflected weaker economic prospects, rather than being purely due to a tightening in credit supply. This would suggest that the decline in inventories was due to a combination of tight credit and a weakening economy.