Australia’s Q2 business profits and stocks likely to weigh on GDP, says ANZ Research

Australia’s business profits and stocks for the second quarter of this year is expected to weigh on the country’s gross domestic product for the similar period, given that the Q2 business indicators release was soft, with weakness in profits and inventories outweighing strength in the wage bill. However, the ongoing uptrend in non-mining profits augers well for the business investment outlook, while the improvement in the wage bill will support household incomes.

Following strong rises in the previous two-quarters, company profits fell 4.5 percent in Q2. The volatility continues to be largely driven by commodity prices, with mining profits down 11.5 percent q/q after an 11 percent rise in Q1. Non-mining profits were also a touch weaker (-0.6 percent q/q) although this follows two-quarters of strong gains, and on an annual basis, they are up 10.9 percent.

Growth in the wages bill picked up in Q2 supported by strong growth in employment (particularly in full-time jobs) in the quarter. Wages rose a solid 1.2 percent q/q, following a 0.2 percent rise in Q1 (downwardly revised from +0.3 percent), bringing annual growth up to 1.6 percent. This strength will provide some offset to weak profit growth in GDP.

Inventories fell 0.4 percent q/q in Q2, following the sharp 1.1 percent gain in Q1. This was considerably weaker than market forecasts (+0.3 percent q/q) and suggests that stocks will take a hefty 0.6ppt off GDP growth in Q2.

"We expect the weakness in non-mining profits to be temporary, given strong business conditions and reported profitability in the business surveys," ANZ Research commented in its latest report.

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