The Australian Business Indicators report was consistent with a subdued economic growth outcome in the December quarter. Softness in sales volumes reflects the pressures that are weighing on household demand, while volatile inventories will weigh heavily on growth in the quarter. Higher commodity prices drove a rebound in company profits.
Ahead of the GDP figures for Q4 (out Wednesday), today's Business Indicators series has validated expectations for subdued growth. The demand backdrop was soft over the back half of the year; higher interest rates, cost-of-living pressures and the winding down of the pandemic rebound all playing a role. After a 0.1% lift in Q3, sales volumes lifted by just 0.2% in Q4. The main takeaway is that this is consistent with a subdued economic growth outcome. As the chart below shows, the quarterly change in sales volumes has a strong correlation with growth in the production estimate of GDP.
Sales growth remains patchy across the economy. Some industries saw sales increase into year-end, but that was largely offset by weakness in others. From the perspective of households, demand for hospitality (-3.2%q/q) and arts and reaction services (-1.7%q/q) weakened sharply, but other areas such as transport (1.1%q/q) and retail (0.6%q/q) lifted.
With sales essentially flatlining over the year (0.6%), inventories have trended sideways around quarterly swings. The quarterly profile for inventories in 2023 was: Q1 1.4%, Q2 -1.4%, Q3 1.2%, and Q4 -1.7%.
Whereas in Q3 inventories added considerably to GDP growth (0.9ppt), this looks to reverse in Q4. Based on today's report, inventories are estimated to deduct 1ppt from Q4 GDP. The mining industry - the main factor behind higher inventories in Q3 due to transport delays - saw a 5.5% contraction in Q4 as these disruptions cleared.
Company profits rose by a robust 7.4% in the quarter to $141bn, but were down 5.4% on a year ago. Quarterly profits lifted thanks almost entirely to the mining sector (17.3%), driven by higher commodity prices, while non-mining profits were broadly flat (0.1%). Adjusting for changes in inventory valuations (a similar approach is used in the National Accounts), underlying company profits lifted by a more modest 3.8%q/q to be down 5.9% through the year, reflecting headwinds from earlier falls in commodity prices, higher input costs and slowing demand.
Growth in the wages bill continues to slow, reflecting the easing in labour market conditions that has occured, with employment growth moderating and businesses cutting back on hours worked. Annual growth remains elevated at 8% but is down from the peaks above 11% in late 2022 and early 2023. Quarterly growth slowed to 0.9%, its weakest outcome since Q3 2021 which was impacted by Covid lockdowns (-1%). The wages bill was coming off a 3% acceleration in Q3 as rises to the minimum wage and awards came into effect.
