Soft tone points to sluggish conditions. Q4 company profits: 0.8%qtr, 10.5%yr. Q4 wage incomes: 0.8%qtr, 4.1%yr. Q4 inventories: -0.2%, 0.0ppt contr’n.
The Business Indicators survey provides an estimate of business inventories and partial information on incomes.
The tone of the December update was on the soft side, pointing to sluggish conditions late in 2018.
Inventories levels declined and profits rose, but only modestly so.
The income data broadly met our expectations while inventories provided a small downside surprise.
Our forecast for Q4 GDP remains 0.2%qtr, 2.4%yr. Recall that we downgraded our forecast last week in the wake of news that construction activity contracted sharply.
In the December quarter, company profits grew by only a modest 0.8%. That was below expectations but broadly as we anticipated (market median 3.0% and Westpac 1.0%).
Profits on an adjusted basis (to be more consistent with the national accounts measure) grew by 1.8% we estimate – matching our forecast.
The lift in company profits is centred on the mining sector which is benefitting from higher commodity prices.
Mining profits increased by 4.0% in the quarter, the fifth consecutive quarterly gain. Profits in the sector are 26% above a year ago and 125% higher than at the end of 2015, which was the low point for global commodity prices.
The picture around non-mining profits is very different, with profitability squeezed by rising costs and patchy demand. Non-mining profits were flat in Q4 and have been broadly unchanged since March 2018.
For wage incomes, conditions are challenging.
Nominal wage incomes (that is, wages and employment) grew by 0.8% in the quarter. This is broadly consistent with the more modest gains in hours worked, which rose by 0.4%qtr, 1.5%yr in Q4. This is less upbeat than numbers employed, which grew by 0.7%qtr, 2.3%yr in Q4.
Annual wage income growth is 4.1% currently, moderating from around 5% at the start of the year and below the long-run average of 5.4%.
With consumer inflation, the CPI, running at 1.8%, this implies real wage income growth of around 2.3% – a pace which points to the risk of lacklustre momentum in consumer spending.
Inventories broadly stalled over the second half of 2018, inching 0.1% lower in Q3 and edging down by 0.2% in Q4. That was a weaker than anticipated outcome (market median and Westpac 0.3%) and will see inventories have a neutral impact on activity in the quarter (vs a forecast +0.1ppt).
