Australian Business Indicators Q1: Inventories 3.2%

Resilient demand amid the headwinds from Omicron, floods on the east coast and a pick up in inflation underpinned business conditions for Australian firms in the March quarter. An easing of supply pressures boosted inventories back to pre-pandemic levels.  

Business Indicators — Q1 | By the numbers 

• Inventories expanded by 3.2% in Q1 to $177bn, well above the consensus forecast (0.7%). This follows the 1.5% rise in the previous quarter. 
• Company gross operating profits lifted by 10.2% over the quarter (vs 5% exp) to $140.4bn, to be up by 25.3% through the year. 
• Wages and salaries increased by 1.8%q/q to $158.4bn (5.2%Y/Y)
• Sales were up by a solid 1% in Q1 after the reopening rebound in Q4 (3.6%). Annual growth in sales moderated to 2.4% from 3.6%. 

Business Indicators — Q1 | The details

Amid the disruptions during the quarter from the Omicron wave and floods on the east coast, business conditions showed resilience in the March quarter as demand held up. Sales lifted by 1% in the quarter, with wholesalers (3.1%) and the transport sector (6%) the largest contributors indicating some easing of supply pressures, as well as reflecting the easing of travel restrictions for the latter. Hospitality (3.6%) and retail sales (0.9%) expanded further from their reopening driven rebounds post the Delta lockdowns as more pent-up demand came through.

Alongside rising sales came a further rebuild in inventories, which have recovered to their pre-pandemic levels. Throughout the Covid period, supply chain pressures and input shortages have left firms sitting on low levels of inventories, in turn contributing to inflation pressures. The rebuild in inventories over the past two quarters (up 4.8% over the period) suggests an easing of supply constraints. Inventories are now back to pre-pandemic levels for retailers (+0.3%) and manufacturers (+0.6%) and well above for wholesalers (+7.1%). There is still a shortfall in the hospitality sector (-1.5%), which is still in the process of rebuilding capacity after the easing of border restrictions. 

Company profits lifted by 10.2% in the quarter and by 5.6% if adjusted for inventory valuations. Gross mining sector profits surged by 25.3% on the back of the acceleration in commodity prices following the war in Ukraine. Non-mining sector profits declined overall (-1.8%q/q), with margins likely under some pressure from rising input costs, including wages. 

The aggregate wages bill was up 1.8% over the quarter and was 5.2% higher through the year. This was slightly lower than Q4's increase (2.1%), likely due to hours worked taking a hit from Omicron and the floods. Hiring expanded over the quarter and forward-looking indicators of demand suggest this will continue for some time.   

Business Indicators — Q1 | Insights

Consumer demand was robust over the first quarter despite the headwinds from Omicron, severe wet weather and rising prices. This backdrop meant it was a decent quarter for Australian businesses, though the non-mining sector did see some pressure on margins, albeit with profits still at high levels. Inventories surged, recovering to their pre-pandemic level with supply constraints easing, but this is ahead of the impact of China's lockdowns. This will have a positive impact on Q1 GDP, potentially contributing more than 1ppt to activity. Mining profits soared, with the acceleration in commodity prices also boosting the nation's terms of trade. On the back of all of this, hiring demand remains robust.