Australian Business Indicators survey: Higher commodity prices boost profits – Westpac

Andrew Hanlan, Senior Economist at Westpac, explains that Australia’s March Business Indicators survey was a generally positive update and suggests that the Australian economy has received a major income boost from a jump in commodity prices.

Key Quotes

“Company profits increased sharply over the past half year.”

“However, there is a concerning trend. That is the weakness of wage incomes. The boost from higher commodity prices is not being passed through to the household sector.”

“While the lack of pass through to the household sector is at odds with the typical experience, where a material impact is evident, it is not altogether surprising. On this occasion, we were anticipating limited pass through given the temporary nature of the jump in commodity prices.”

“Profits rose by 6.0% in Q1, coming on the back of a 20.1% increase in Q4. Annual growth is now 40%. The outcome for Q1 exceeded expectations (market median 5.0% and Westpac 3.5%).”

“Mining profits rose 46.3% in Q4, followed by a 13% increase in Q1, to be 113% above the level of a year ago and 27% above the earlier peak of March 2014.”

“Stronger national income growth is filtering through to sectors beyond mining, with profits across the broader economy improving over the past year. In March, profits ex mining and ex finance advanced by 2.6% to be 14.8% above the level of a year ago.”

“Nominal wage incomes (that is the wages bill) increased by a relatively weak 0.3% in the March quarter. That comes on the heels of a surprising 0.5% contraction in the December quarter.”

“Annual growth in nominal wage incomes is only 0.9%, well below average, which is around 5.5% nationally. Sluggish wage incomes are constraining consumer spending.”

“Inventories bounced back in the March quarter, expanding by 1.2%. While we were anticipating a significant rise in the quarter, after a weak December quarter, the size of the gain exceeded expectations (Westpac 0.8% and market median 0.5%).”

“Inventories will make a positive contribution to growth in the quarter, adding 0.4ppts. We had anticipated a 0.2ppts contribution. We note that the Q1 result merely reverses the subtraction of 0.4ppts in Q4.”

“Mining was the key swing factor over the past half year. A sharp run-down of mining sector inventories in Q4, -$1.4bn, as companies looked to increase export shipments, was largely reversed in Q1, +$1.0bn.”