Australia: Business indicators shows company profits gain 6.0% while business inventories up 1.2% in Q1 - Westpac

Andrew Hanlan, Research Analyst at Westpac, explains that according to the Australian Q1 Business Indicators, company profits were up 6.0% in Q1, including mining +13% while the business inventories were up by 1.2% which is likely to add 0.4ppts to Q1 growth.

Key Quotes

“Inventories
Inventory levels resumed their upward trend, as firms increase stock levels to meet rising demand

Inventories rose 1.2% in Q1, surprising to the high side (market median 0.5%, Westpac 0.8%). They will make a sizeable positive contribution to growth in the quarter, adding 0.4ppts. We had anticipated a 0.2ppts contribution. Note that Q4 inventory figure was revised lower, to a flat result, downgraded from +0.3%.

Mining is a swing factor quarter to quarter, as companies adjust export shipments in response to price fluctuations. In Q4, there was a sharp rundown of mining inventories, -9.7%, followed by a rebound in Q1, +7.7%.”

“Company profits

Company profits are on the rise, largely centred on higher commodity prices. The recent rebound in commodity prices has provided a significant income boost to the economy.

In Q1, company profits increased by 6.0%, including a 13% rise in mining profits. This follows a 20.1% rise in total profits in Q4, with mining up 46.3%.”

“Wage incomes

Nominal wage incomes (that is, wages and employment) increased by a relatively weak 0.3% in Q1. This follows a surprisingly weak Q4, when nominal wage incomes actually contracted, -0.5%. The prior to quarters were somewhat better at 0.5% and 0.7%. Annual nominal wage income growth is particularly weak, at around 1%, well below the historic average of 5.5%.

Notably, the income boost from higher commodity prices has yet to flow through to the household sector, whereas typically in the past we do see a material impact.

Weakness in wage incomes is concerning, constraining consumer spending power. The national accounts on Wednesday will provide a clearer picture of overall household income and spending.”

“Unincorporated profits (i.e. small businesses)

Small business profits enjoyed a good half year, up 7.2% in Q1 after a 12.8% rise in Q4. The home building upswing is a plus for small businesses in and related to the construction sector.”

“Implications for Q1 GDP 

Our forecast for Q1 GDP is 0.4%qtr, 1.7%yr, revised lower last week in the wake of weaker than expected construction data (with storms disrupting home building work) and softer than expected equipment spending.

Today, the business indicators surveys suggests that the risks to our 0.4% figure are to the upside.

Tomorrow we receive net exports (which will be a negative, with some downside risks) and public demand. We will finalise our GDP forecast following these updates ahead of the national accounts on Wednesday.”