Inventory rebuilding by Australian firms slowed in the June quarter as demand conditions remained robust. Company profits surged to new record highs, though the divergence in profits between the mining and non-mining sectors has widened. A strong labour market and fewer disruptions to activity led to the largest quarterly jump in the wages bill in 14 years.
- Inventories lifted by 0.3% in the June quarter to $179.2bn, lower than the 1.5% increase expected and down from Q1's 3.6% rise.
- Company gross operating profits lifted by a further 7.6%q/q (vs 4.5% expected) to $150.6bn to be up by 28.5% through the year.
- Wages and salaries advanced by 3.3% to $163.9bn, a 6.8% rise over the year.
- Sales increased by 1.1% in the June quarter, matching the rise seen in Q1; volumes have expanded by 2.6% over the year.
Business Indicators — Q2 | The details
Demand conditions held up over the June quarter despite headwinds from cost-of-living pressures, RBA rate hikes and disruptions from Covid and La Nina. Sales volumes lifted by 1.1% in the quarter and by 0.9% if the mining sector is excluded. Accommodation and food services surged by 10.7%q/q and the transport industry lifted by 5.5%, with both benefitting from the reopening of the international border and pent-up demand domestically. Rises in arts and recreation (5%q/q), other services (1.8%q/q) and retail (0.4%) reflects the broad-based nature of demand.
Sales strongly outpaced inventories (0.3%q/q) following a strong rebuild in the March quarter (3.6%q/q). That dynamic points to a negative contribution to Q2 GDP growth from inventories, potentially unwinding Q1's contribution (+1ppt). Overall, relative to their respective pre-Covid levels, inventories are around 2% higher compared to around 4% for sales. Inventories have been held back by supply constraints while the demand side has been boosted by reopenings and large-scale stimulus.
Gross company profits rose to new record highs, surpassing $150bn in the quarter. Adjusting for changes in inventory valuations, company profits lifted by 8.6%q/q to $141.3bn. Surging prices across the commodities complex following the war in Ukraine and other supply-related issues have seen mining sector profits accelerate by 43% over the first half of 2022 to $81bn. In contrast, profits in the non-mining sector declined slightly lower over the first half (-1.9%); although demand has been robust, margins have come under pressure from rising input costs.
Spending on wages and salaries saw its sharpest quarterly rise since Q2 2008, up by 3.3% and 6.8% higher over the year. Recall that in the March quarter hours worked in the economy contracted by 0.9% due to the disruptions from Covid and flooding on the east coast. Fewer disruptions in Q2 boosted hours worked, and employment continued to increase, both factors boosting wages. Also, in a tightening labour market many Australians would have been working more hours at overtime rates.
Business Indicators — Q2 | Insights
Inventories are set to weigh notably on quarterly activity, though a solid rise in Q2 GDP of around 1% is still expected. Today's report reflected the resilience of demand conditions in the Australian economy, boosted by the full reopening of the tourism sector. Surging commodity prices are supporting national income and will drive higher government tax revenues, though margin pressures are evident in the non-mining sector. A strong labour market and a rebound in hours worked saw the wages bill accelerate in the June quarter.
