The Changing Stock Cycle in Australia1

Traditionally, fluctuations in firms’ stocks have played a key role in shaping the business cycle in industrialised economies. While changes in stocks – that is, inventory investment – account for only a very small part of the level of Gross Domestic Product (GDP) they play an important part in explaining changes in the level of GDP. In Australia, over the past thirty years, quarterly changes in inventory investment have, on average, accounted for around half of the quarterly change in GDP. Over the past decade, however, the nature of the stock cycle appears to have changed; it has become less pronounced and accounts for a smaller part of the business cycle. This article examines the changing nature of the stock cycle in Australia. It begins by exploring the way in which stocks react to expected and unexpected changes in demand. It then looks at how these relationships have changed through time. Finally, it discusses the implications of these changes for the behaviour of the business cycle. THE STOCK CYCLE