Australia’s economy is already set to experience its weakest rate of growth in 10 years — but the latest “business indicators” suggest the economy could be in faring worse than expected.
- Business inventories fell 0.9 per cent in the June quarter, a worse-than-expected result
- Employers’ spending on wages jumped 4.7 per cent (annually), its largest increase in two years
- Company profits surged 31.9 per cent over the year, but outside the mining sector profits only rose 1.5pc since June 2018
Many economists are expecting Wednesday’s GDP result to show that the nation’s economy grew by 0.5 per cent in the June quarter.
It means annual GDP growth would have lifted 1.4 per cent, the weakest result for Australia since 2009, during the global financial crisis.
However, the final result could be even weaker due to the mixed, but overall disappointing business indicator figures, released by the Australian Bureau of Statistics (ABS) on Monday.
Businesses ramped up their spending on wages, operating profits skyrocketed (but only for mining companies) and there was a massive drop in inventories.
Falling inventory and ‘insufficient’ stimulus
The ABS data revealed business inventories fell by a much steeper than expected 0.9 per cent in the three-month period leading up to June.
It was a complete turnaround from the March quarter, during which they jumped 0.8 per cent.
“The inventories data always come with swings and roundabouts given they can imply stronger demand,” JP Morgan economist Ben Jarman said.
Essentially, it is the amount of money that businesses are spending on goods (to sell to consumers), or the raw materials used to manufacture those goods.
“But with a soft retail volumes report and the [healthy] plant and equipment spending numbers already in hand, the demand side is fairly locked down, and so the new information here implies weakness on the production side,” Mr Jarman said.
The sharp drop in inventories will wipe out 0.6 percentage points from the already-low GDP expectations, according to economists from JP Morgan, CommSec, Commonwealth Bank, Westpac and NAB.
Mining (-1.5 per cent), wholesale trade (-1.1 per cent), retail (-0.9 per cent), and “accommodation and food services” (-2.3 per cent) were the sectors that experienced the biggest falls.
“The very real possibility of a negative quarterly [economic growth] number … makes it harder to sell the idea that recent stimulus will prove sufficient.”
In the last few months, there have been several attempts to stimulate the economy — from the Reserve Bank implementing two back-to-back interest rate cuts, to the Federal Government’s income tax cuts and massive infrastructure spending plans.
However, the weak business inventory figures might be offset by Tuesday’s net export figures (also from the ABS) — Reuters-polled economists are predicting this will add 0.4 percentage points to second-quarter GDP.
Wages spending hit two-year high
The amount of money that employers are spending on wages and salaries jumped 4.7 per cent since the June 2018 quarter — its biggest increase since June 2017.
But adopting a smaller timeframe, it was a 1.4 per cent rise since the March quarter.
Although employers are spending more on wages, this has not translated into substantial pay rises for many workers.
Wage growth was stagnant in the June quarter, up 2.3 per cent on a yearly basis.
CBA economist Belinda Allen explained: “This measure captures … the impact of changes in wages growth as well as changes in employment.”
“While workers’ wage growth is sluggish, Aussie firms’ wage bills are growing at a faster pace than the decade average, reflecting a still-solid labour market,” CommSec chief economist Craig James said.
Employers spent a lot more on administration (+12.7 per cent) and utilities (+12.1 per cent) roles — but nowhere near as much for construction jobs (+1.5 per cent).
“The construction industry is being impacted by the downturn in residential construction,” Ms Allen said.
“The large pipeline of transport infrastructure work should support over time.”
Mining profits dominate
Meanwhile, the operating profits of Australian companies surged 4.5 per cent between the March and June quarters — more than doubling what the market had expected.
This equates to a 12.5 per cent boost in annual profit since June 2018, but a deep dive into those figures show that it was the mining industry that, by far, did the heavy lifting.
Companies in the mining sector saw their quarterly profits lift 10.9 per cent, and yearly profits surge 31.9 per cent.
“Strong commodity prices, in particular for iron ore, is boosting profits for this sector,” Ms Allen said.
“Nevertheless, the large foreign ownership of mining companies means a significant proportion of mining profits [around 75 per cent on RBA estimates] leak offshore.”
In contrast, profits for non-mining companies rose very slightly (+0.3 per cent) during the June quarter, but it was a relatively small annual gain since June last year (+1.5 per cent).
Overall, the mixed result — strong headline profit and higher wage spending, but a significant drop in inventories — casts doubt on the credibility of the Reserve Bank’s recent predictions about the Australian economy, which now appear too be too optimistic.
“This would be a major disappointment to the RBA and suggests that the RBA will have to downgrade its outlook further in the November Statement on Monetary Policy,” NAB economist Kixin Owyong said.
“The Reserve Bank’s latest forecasts suggested that a recovery in growth started in the June quarter, but that view appears unrealistic.”