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Australia: corporate profits slow in Q2, while inventories weaker than expected

Company gross operating profits grew just 1.4%q/q in the June quarter (JPMorgan 3.5%, consensus 2.0%), after bouncing 7.3% in Q1 (revised down from 7.6%).

Remember, though, that the Q1 result was distorted by the inclusion of Telstra's profits for the first time (Australia's largest telecommunications company, which was effectively privatized last November).

Meanwhile, business inventories rose just 0.4%q/q (JPMorgan and consensus 1.0%), after rising 1.5% in the previous three months (revised up from 1.4%).

The weaker than expected growth in inventories points to downside risk to our economic growth forecasts for Q2 of 0.6%q/q. The GDP print is scheduled for release tomorrow.

Profits in Q2 were buoyed by the construction sector, where profits bounced 13.8%q/q, followed by mining (+3.8%), which rebounded following three straight quarters of declines.

Other gains were reported in property and business services (+3.2%), retail trade (+3.0%), wholesale trade (+2.6%) and manufacturing (+1.6%). Profits fell in two industries, however: transport and storage (-9.6%) and 'other selected industries' (-3.6%).

Despite the moderation in profits in the June quarter, corporate Australia continues to enjoy healthy revenue growth. Moreover, companies appear to be keeping a lid on controlling costs. Labour costs, for example, remain well contained, despite persistently tight labour market conditions.

The other positive news today is that firms are accumulating fewer inventories, which means they are tying up less working capital and reducing storage and management costs. That said, inventories look now to make a smaller contribution to economic growth in Q2 than previously forecast.

Other data released today showed that the number of building approvals grew 0.4%m/m in July (JPMorgan -3.5%, consensus -2.0%) after surging 6.9% in June (revised down from 7.5%). T

he total number of building approvals for private sector houses rose 0.7%m/m, while those for other private dwellings slumped 6.5% after surging more than 20% in the previous month on the back of an influx of permits for multi-dwelling apartments.

The details:

Company operating profits rose 1.4%q/q in Q2, after surging 7.3% in Q1. The biggest rise in profits was in construction, up 13.8% over the quarter. Most other industries reported only modest gains, while profits fell in transport and storage (down 9.6%) and 'other selected industries' (down 3.6%).

Inventories rose 0.4%q/q in Q2, after rising 1.5% in the March quarter.

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