Company profits were weaker than expected in the June quarter but they shouldn’t be a drag on economic growth figures due out on Wednesday.
June quarter business indicators data showed an 0.8 per cent fall in company gross operating profits, the Australian Bureau of Statistics said on Monday, worse than the 0.9 per cent rise the market was expecting.
JP Morgan economist Ben Jarman said the business data would not change JP Morgan’s forecast of 0.4 per cent gross domestic product (GDP) growth in the June quarter.
But the weak profitability is holding back hiring, he said.
“In our view, the main plank for labour market stabilisation in 2014 will be a normalisation of profit’s share of (national) income, thanks to accumulated wage restraint and the productivity gains that will need to occur,” he said.
“The forward looking implications of today’s numbers are also concerning, with inventories building up, and the (profit) margin recovery we see as a necessary condition for a turn in the hiring cycle is not happening quickly enough.
“We expect the national accounts on Wednesday to reveal firms’ share of income slipping again to structurally low levels, which will act to postpone the day where margins have recovered enough to motivate a turn in hiring and investment.”
Estimated business inventories, in seasonally adjusted chain volume terms, were up 0.2 per cent in the June quarter.
Economists were expecting inventories to rise 0.1 per cent.
Commonwealth Bank economist John Peters expects GDP growth to slowly improve.
“The period of extreme income weakness is ending but recovery is slow,” he said.
“We will need to see a stronger lift in nominal outcomes for sentiment indicators to improve.
“Corporate profits were weaker than expected but wages and salaries growth was a little stronger.
“Inventories look like they will make a marginally bigger positive addition to Q2 growth, than previously thought.”
The median forecast for GDP is 0.6 per cent in the June quarter, according to an AAP survey of 13 economists.
If the forecast is correct it would be the third consecutive quarter with GDP at 0.6 per cent, for an annual rate of 2.5 per cent.
