Australia’s Q1 weaker-than-expected company profits point to downside risk for GDP, says ANZ Research

Australia’s weaker-than-expected company profits for the first quarter of this year are likely to pose downside risks to the country’s gross domestic product (GDP), due on Wednesday, projected at 0.6 percent q/q by ANZ Research.

Company profits posted a modest headline rise (+1.7 percent q/q) in Q1, following an upwardly revised rise of 2.8 percent in Q4 (initially reported as +0.8 percent). After adjusting for inventory valuations, the result was a little better, with non-financial profits on a GDP basis rising 2.8 percent q/q.

Once again, profit growth was held up by the resources sector, with mining profits up a solid 5.2 percent q/q and 22 percent y/y. Non-mining profits actually fell in Q1 (-0.4 percent q/q), and are now up only 0.3 percent over the past year.

Across the non-mining sectors, weakness was most apparent in arts & recreation (-15 percent q/q), rental, hiring & real estate (-10 percent) and construction (-7 percent). Profits rose solidly in administrative & support services (+14 percent), finance (+8 percent) and information media (+5 percent).

Overall, the profit results are a disappointment, and difficult to reconcile with upbeat investment plans in the Q1 capex survey last week. And small business profits posted a large 3.7 percent drop.

Growth in the wages bill was solid at +1.1 percent q/q, with the Q4 result revised up a touch to +0.9 percent (from an initially reported +0.8 percent). With the increase in this measure of wages driven largely by gains in employment, the GDP measure of average wages is likely to rise only modestly.

Inventories were surprisingly strong (+0.7 percent q/q). While this is a positive for Q1 GDP, (adding 0.2ppt), rising inventories and disappointing sales are not a good combination for the outlook, ANZ Research added in the report.