Australian business conditions are showing resilience, though headwinds to household spending - including from rising interest rates - are resulting in uneven effects on demand. Some industries continue to expand while others are under pressure. Business profits remain elevated overall, but profits in cyclical industries such as construction and retail have contracted over the year. Inventories came in stronger than expected, likely to add around 0.3ppt to Q1 GDP growth.
- Inventories increased by 1.2% in the quarter to $186.9bn (chain volume terms), well above the expected rise of 0.3%, to be 4.1% higher than their level a year earlier.
- Company gross operating profits were 0.5% higher in Q1 at $150.4bn, up 7.1% through the year.
- Wages and salaries costs slowed to a 1.8% rise in Q1, leaving growth in year-ended terms little changed at 11.4%.
- Sales volumes increased by 0.5% in the first quarter (matching Q4's rise), though the annual pace slowed from 3.3% to 2.8%.
Business Indicators — Q1 | The details
The March quarter Business Indicators data reflected what has been reported in the NAB Business Survey in recent months — while confidence has weakened on the expectation for growth to slow, business conditions remain solid.
The momentum in sales volumes has slowed as the rebound from the pandemic has faded, but sales remain at an elevated level, up 5.7% on pre-pandemic volumes (+6.4% excluding the mining sector) at the end of 2019. Sales volumes expanded by 0.5% in the quarter - the same as in the previous quarter.
Beneath the surface, however, sales paint a mixed picture of consumer demand. Hospitality, transport (includes travel) and household services continue to expand; on the other hand, the retail sector saw sales contract for the second quarter in succession and weakness is also evident in construction, not helped by poor sentiment due to rising insolvencies. Higher interest rates appear to be hitting the financial sector, with spillover effects weighing on adjacent sectors, such as real estate and professional services.
Business profits rose modestly by 0.5% in the March quarter, though this revises to a 1.2% lift once adjusted for changes in inventory valuations. Profits remained elevated at around $150bn in aggregate in the quarter, up more than 50% on their pre-pandemic level on a combination of robust demand and high inflation. Non-mining profits advanced in the quarter (3.3%), which offset a fall in mining profits (-2.2%). Some industries are under pressure from weakening demand and cost increases; notably, profits in the construction industry fell by 3.4% over the year, while retail profits are down 2.6% for the period.
Strong labour market conditions and upward pressure on labour costs has seen the national wages and salaries bill increase by more than 11% over the past year, though the momentum is slowing. The 1.8% rise in quarterly wages was the slowest rise in a year.
Australian firms' inventory levels increased by 1.2% in the March quarter, rising to be 5.5% above their pre-pandemic level. The major driver in Q1 was a 2.9% rise in wholesaler inventories. This aligns with the monthly trade data that has been reporting a rise in vehicle imports into the country.
Business Indicators — Q1 | Insights
Based on today's details, inventories are estimated to add 0.3ppt to quarterly GDP growth in the March quarter - with the boost in wholesaler inventories (discussed above) the key driver. Resilient sales volumes - albeit mixed across industries - and further growth in non-mining sector profits suggest business conditions are on the whole holding up.