Australia's Business Indicators report for the September quarter contained some constructive detail around discretionary demand, while the result for inventories (1.2%) points to a strong contribution (0.9ppt) from this component to Q3 GDP growth (currently expected at around 0.4%).
Sales volumes in the third quarter contracted marginally (-0.1%) on a headline basis but lifted modestly (0.2%) excluding the mining sector (-1.8%). This was an improvement for non-mining sales following a 0.1% fall in the previous quarter, consistent with expectations that discretionary-related demand fared better in Q3. Reflecting this, categories such as hospitality (1.5%) and arts and recreation (2.6%) posted their strongest quarterly rises for 2023, likely boosted by the FIFA Women's World Cup, co-hosted by Australia and New Zealand in late July to late August. Retail sales (1.4%) also advanced at their fastest pace in a year.
A key factor behind the improvement in discretionary demand was a strengthening in real incomes. Aggregate wage costs lifted by 2.7% in the quarter (9.7%Y/Y), outpacing the gains in the prior two quarters (Q1 1.9% and Q2 2.0%) as award rates increased following the Fair Work Commission's 2022-23 ruling.
Company profits declined at a headline level by 1.3% in the quarter to $131.1bn (-1.7%Y/Y). Adjusted for inventory valuation effects, profits were down by 0.9% in Q3. The decline in company profits was driven entirely by a 7.7% contraction in the mining sector (to $54.9bn), reflecting falls in commodity prices. Non-mining profits lifted by 3.8% (to $76.2bn), rebounding from their Q2 fall (-3.3%). Profits in the non-mining sector are up 15.7% through the year, strongly suggesting that higher input costs have been passed through to consumers rather than being absorbed within margins.
Inventory levels are estimated to have increased by 1.2% in the quarter to $209bn, completely counter to expectations for a 0.8% decline. This increase points to a sizeable contribution of 0.9ppt to Q3 real GDP. The mining sector was the key driver seeing its inventory levels surge by 8.9% for the quarter. By contrast, retail inventories were flat and declined in wholesale trade (-0.2%) and hospitality (-1.9%).
