Australia's Business Indicators series for the June quarter was softer than expected across the key details for inventories (-0.2%) and company profits (1.8%) going into Wednesday's economic growth figures. However, it also highlighted the resilience of domestic demand, supported by the data centre build out.
Today's report showed that demand conditions in the domestic economy remained resilient to global and domestic headwinds. But company profits were squeezed by renewed inflationary pressures, including from the fuel price shock. Sales volumes rose 0.8% in the quarter (2.8%Y/Y), though that was boosted by a rebound in the mining sector (3.3%) after production and exports were impacted by cyclones in the March quarter. However, excluding mining, sales still lifted 0.5% in the quarter to be up 1.5% across the first half of the year.
The data centre build out looks to have remained a prime mover for the economy in Q2, reflected in gains across professional services (4.3%), construction (3.1%) and telecommunications (3%). The consumer-related sector was mixed: hospitality (0.5%) and retail (0.4%) rose but recreation fell (-0.3%). Higher fuel prices likely weighed on manufacturing (-0.1%), though the transport sector still advanced (1.2%). Wholesalers also rose (0.6%) suggesting firms may have aimed to get ahead of supply disruptions, though this is more likely to reflect strong EV sales.
Company profits were up 1.8% in the June quarter (7.4%Y/Y), slightly below expectations (2%). However, that reduces to a 0.9% rise after adjustment for inventory valuations, which more closely aligns with the National Accounts methodology.
The mining sector was the key driver (6.8%) as production came back on line and as commodity prices rose alongside the energy shock. Non-mining sector profits fell by 1%q/q (7.7%Y/Y), the first decline in a year, pointing to margin pressures and the fuel price shock. It also suggests pricing power is not as strong as it was back in 2022 as inflation accelerated.
Companies are also dealing with solidly rising labour costs. The wages bill lifted a further 1.4% in the June quarter, rising by 5.7% through the year. The punchiest rise came in telecommunications (4.3%), again likely data centre related.
Today's report estimated inventories contracted by 0.2% in the June quarter, a downside surprise on expectations for a 0.5% lift (prior: +0.7%). Based on this, private non-farm inventories are likely to deduct 0.3ppt from quarterly GDP growth, with details on public sector inventories due tomorrow. Mining inventories, which accumulated due to adverse weather in Q1, started to be run down in Q2 (-4.8%) as production and shipping came back on line. Inventories were also weighed by manufacturing (-0.9%) and utilities (-13.1%). This more than offset builds in wholesale trade (1.7% - likely EV related), retail trade (1%) and hospitality (3.4%).
