Independent Australian and global macro analysis

Sunday, March 1, 2020

Australian Business Indicators; Inventories +0.3% in Q4

Australia's December quarter Business Indicators data suggested inventories are likely to contribute positively to GDP growth in Q4, though weakness in mining sector income from falls in commodity prices will hit national income. 

Business Indicators — Q4 | By the numbers 
  • Inventories lifted by 0.3% in Q4 to $165.4bn; an upside surprised on consensus for a 0.1% fall (prior rev: -0.2%). In annual terms, inventories remained soft at -0.2% from -0.7% in the previous quarter.

  • Company gross operating profits fell by 3.5% to $94.1bn in Q4, which was larger than the 1.3% decline anticipated (prior rev: -0.6%). As a result, annual growth slowed from 9.9% to 2.3%. 

  • Wages and salaries growth lifted by 1.0% in Q4 (prior rev: +1.1%), as annual growth edged up from 4.8% to 5.0%.

Business Indicators — Q4 | The details

Australian firms lifted inventories slightly by 0.3% in the December quarter, but this came after reductions in Q2 (-1.0%) and Q3 (-0.2%). Inventories contributed 0.1ppt to overall activity in Q3 and look set to add a touch more in Q4. On a year earlier, inventories contracted by 0.2% in an operating environment where sales have been weak (-0.1%qtr, +0.6%yr). In the December quarter, inventories were driven by mining (8.5%) and utilities (5.3%) amid weakness from accomodation and food services (-1.7%), retail trade (-1.4%), manufacturing (-0.5%) and wholesale trade (-0.3%).

On a headline basis, gross company profits fell by 3.5% in the quarter, with annual growth stepping down from 9.9% to 2.3%. However, to be consistent with the methodology in the National Accounts, this needs to be adjusted for changes in the value of inventories. After that adjustment is made, company profits were down by a smaller 1.7% in the December quarter. The mining sector drove this overall decline as commodity prices corrected from highly elevated levels, with gross profits falling by 8.0% in Q4 slowing annual growth from 23.4% to 4.7%. Non-mining sector gross profits declined by 0.2% in the quarter and were soft over the year (0.8%). 


Wages and salaries lifted by 1.0% in the quarter, which was a touch softer than in the previous 3 quarters as employment growth based on the ABS's Labour Force Survey slowed over the final months of 2019 (0.3% from 0.6% in Q3) and hours worked also eased (0.4% from 0.9% in Q3), though the annual pace edged higher from 4.8% to 5.0%. Healthcare (0.8%qtr, 11.5%yr) remains the standout sector, reflecting strong employment growth. 


Business Indicators — Q4 | Insights

Inventories are likely to add in the order of 0.2ppt to GDP growth in Q4 following on from a 0.1ppt contribution in Q3. The income side of the economy will take a hit from a deterioration in the terms of trade in response to falls in key commodity prices, though will be moderated by the ongoing growth in wage incomes.