Australia: Weak Q2 business indicators - Westpac

Andrew Hanlan, Research Analyst at Westpac notes that Australia’s company profits shrunk by -4.5% in Q2, including mining -11.5%; wages incomes +1.2%. Business inventories -0.4%, impact -0.6ppts.

Key Quotes

“The income side of this update broadly met our expectations.
Inventories will make an even larger than expected subtraction from growth in Q2, suggesting the risks to our GDP forecast of 0.7% are tilted to the downside.”

“Company profits

Company profits fell in the June quarter on a dip in commodity prices and constrained by a squeeze on margins across the broader economy.

In Q2, company profits declined by 4.5%, broadly as expected (market median and Westpac 4.0%). This followed gains of 10.5%, 1.6%, 18.1% and 5.8% for the previous four quarters. The recent bounce in commodity prices stumbled in Q2. Mining profits fell by 11.5% in the June quarter.

Note, that company profits on an adjusted basis, declined by 2.5% (also broadly as expected). This adjustment attempts to place the measure on a basis consistent with that in the national accounts.”

“Wage incomes

Nominal wage incomes (that is, wages and employment) increased by 1.2% in the quarter, broadly meeting our expectations. Hours worked were up strongly in the period, +1.2%, evidence that the economy gained momentum mid-year, rebounding from disruptions earlier in the year. By implication, average wage per hour was flat in the period, potentially reflecting compositional factors as well as the underlying theme of weakness in wages growth.”

“Inventories

Inventories, having increased strongly in Q1, +1.1%, were due for either a consolidation or a correction in Q2. That is how it played out.

Inventory levels fell by 0.4% in Q2, which was even weaker than anticipated (market median 0.3% and Westpac 0.2%).

This will see inventories subtract 0.6ppts from activity in Q2 vs a forecast -0.4ppts. This reversed a sizeable 0.5ppt contribution in Q1.”