Australian Business Indicators Q1: Inventories -1.2%

The ABS's business indicators data for the March quarter confirmed the sharpest run down in inventories in a single quarter in more than 5 years and this will lead to a sizeable contraction to GDP in tomorrow's national accounts. 

Business Indicators — Q1 | By the numbers 

• Inventories fell by 1.2% in Q1 to $163.3bn against an expected fall of 0.6% (prior 0.3%). This was the sharpest quarterly fall since Q4 2014, while in annual terms inventories declined from -0.2% to -2.1% to be at their weakest going back to Q4 2010. 
• Company gross operating profits lifted by 1.1% to $95.029bn in Q1, coming in ahead of the 0.5% lift anticipated and after a 3.5% fall in Q4 last year. The annual pace pulled back from 2.4% to 1.5%. 
• Wages and salaries flatlined in the quarter, slowing sharply from a 1.1% rise in the previous quarter, as annual growth decelerated to 3.8% from 5.0%.

Business Indicators — Q1 | The details

The sharp run down in inventories (-1.2%) in the March quarter was largely anticipated as firms were hit by an unprecedented surge in demand for essential goods ahead of the April COVID-19 lockdown in Australia. Reflecting this were falls in inventories across wholesalers (-0.6%), retail (-1.2%) and manufacturing (-2.0%). Firms in accommodation and food services also appeared to be keen to clear stock (-5.4%) ahead of the implementation of social distancing measures.       

Company gross profits in headline terms lifted by 1.1% in Q1, though annual growth slowed from 2.4% to 1.5% — its weakest pace since Q3 2016. The national accounts use a different accounting treatment for company profits, which abstracts for changes in the value of inventories. In Q1's case, the ABS reported an inventory valuation adjustment from quarter to quarter of $1.633bn. Adjusting gross profits for this, company profits declined by 0.6% in the March quarter. 

Looking across the main details, mining profits advanced by 2.9% in Q1 (3.1%yr) against softness from non-mining firms -0.1% (0.5%yr). 

          

Wages and salaries were flat in Q1, which is the weakest outcome in a single quarter since Q4 2016, while annual growth was lowered from 5.0% to 3.8% to its slowest since Q3 2017. This figure is driven by employment and hours worked, so clearly a very large contraction will be ahead in Q2. Note that the detail in the summary table (above) highlighted significant weakness for wages in arts and recreation (-4.6%qtr) and accommodation and food services (-4.2%qtr), which are two of the hardest-hit sectors by COVID-19 disruptions.  

Business Indicators — Q1 | Insights

The run down on inventories to meet an unprecedented surge in demand for essential goods before the nation's period of lockdown in April will subtract in the order of 0.4ppt from GDP growth in Q1. The income side of the economy will be hit by falls in company profits — despite the terms of trade rising in the quarter — while households will be constrained by weakness in wages, most likely due to weakness in hours worked associated with the early stages of the onset of the pandemic.