Business Indicators — Q2 | By the numbers
- Inventories contracted by -0.9% in Q2 to $161.1bn against the market forecast for a 0.3% rise. From a year earlier, inventories swung from +1.5% in Q1 to -0.3% in Q2.
- Company gross operating profits increased by a stronger-than-expected 4.5% in Q2 (median forecast was +2.0%) to $98.03bn, which drove the annual pace from 8.3% to 12.5%.
- Growth in wages and salaries increased by a further 1.4% in Q2 (prior 1.2%) to $143.34bn and is 4.7% higher through the year (prior 4.4%).
Business Indicators — Q2 | The details
Against expectations for a modest rise, Australian firms reduced inventories by a sizeable 0.9% in the June quarter, its largest quarterly fall since Q4 2014. In an indication of soft demand conditions, the level of inventories held is down by 0.3% from a year earlier having decelerated from a +1.5% pace in Q1. In Q2, the details were; mining -1.5% (-3.1%Y/Y), manufacturing -0.3% (+1.0%Y/Y), utilities +6.0% (-6.7%Y/Y), wholesale trade -1.1% (-2.5%Y/Y), retail trade -0.9% (+3.9%Y/Y), and accomodation and food services -2.3% (-2.0%Y/Y). Note that the 1.5% fall from mining follows a 2.1% rise in Q1 after adverse weather caused supply disruptions.
Company gross operating profits increased by 4.5% in the June quarter and by 12.5% over the year, its fastest annual pace since Q3 2017. These outcomes were up solidly from 2.6% in the March quarter and 8.3% year-on-year. However, the headline details conceal a stark divide between the mining and non-mining sectors. Driven by the tailwind from elevated commodity prices, gross operating profits for mining accelerated by 10.9% in the quarter to be 31.9% higher through the year. Gross operating profits ex-mining were subdued at 0.3% in Q2 and 1.5% for the year.
Across the non-mining industries, the details in Q2 were; manufacturing -3.4% (-10.7%Y/Y), utilities -11.3% (+0.4%Y/Y), construction +4.1% (+12.7%), wholesale trade +3.0% (-1.6%Y/Y), retail trade +3.4% (+0.4%Y/Y), accommodation and food services +5.6% (+30.7%Y/Y), transport -2.0% (+8.7%Y/Y), telecommunications -4.7% (-4.0%Y/Y), finance and insurance -5.1% (-15.6%Y/Y), real estate services +5.1% (-5.9%Y/Y), professional services +6.5% (+27.8%Y/Y), administration +2.6% (+6.0%Y/Y), arts and recreation +11.5% (+9.0%Y/Y), and 'other' services +1.9% (-4.1%Y/Y).
The wages and salaries estimate is the key partial for the Compensation of Employees figure in the National Accounts. Growth in wages and salaries paid was 1.4% in Q2, its strongest quarterly rise in 2 years, which reflects growth in employment and hours worked. The ABS's Labour Force Survey indicates that employment lifted by a robust 0.6% in Q2, though according to its measures aggerate hours worked softened. We will have to wait for Wednesday's National Accounts for confirmation of details regarding hours worked.
Business Indicators — Q2 | Insights
The much sharper-than-expected fall in inventories adds to the downside risks for Q2's GDP growth outcome, which comes after weakness in last week's Construction Work Done report and patchy details for capex spending in Q2. A clear positive is the surging profitability in the mining sector that will flow through to increased federal government tax receipts, though it is a subdued picture for profitability in aggregate for the non-mining sector. Growth in total wage income has been supported by robust employment growth and record-high workforce participation, though spare capacity remains elevated and is holding back the pace of wages growth for households.
