Australia | Mar 02 2009
By Chris Shaw
Last week economists were expressing some optimism regarding Australia’s economic growth outlook, suggesting growth in the December quarter could be flat in an outcome that would help avoid a technical recession of two subsequent quarters of negative GDP growth.
But ANZ Banking Group senior economist Katie Dean takes the view today’s company profits and inventories data make such an outcome less likely as both fell by more than the market had expected.
Company profits were down 6.4% for the quarter and for ex-mining companies the decline was an even more severe 11.3%. Westpac senior economist Andrew Hanlan points out the fall in profits reflects both lower turnover and a margin squeeze as costs are rising on the back of the weaker Australian dollar in recent months.
According to Commonwealth Bank economist James McIntyre the decline in profitability was even more pronounced in before tax terms, sliding by more than 17% in the quarter on the back of a halving of profits in both the property and business services sector. He takes the view stronger company profits had driven a boom in normalised GDP in recent years but today’s data signal the end of that trend.
Final sales for the three months were also weaker, down 2.2%, and inventories fell by 1.9% in what was the largest quarterly fall since the 1980s. While Dean estimates the inventories data could subtract as much as 1.2% from Australia’s GDP figure for the December quarter, Westpac’s Hanlan is even more cautious and estimates it could take as much as 1.3% off the Q4 GDP. Hanlan sees the fall in inventories as a sign businesses are attempting to control stock levels at a time of weakening sales.
Dean also notes the numbers could result in a downward revision of GDP in the September quarter and this could mean a technical recession is already in place if December quarter numbers also turn out negative. With inventories and profits for the third quarter likely to be revised higher, Dean thinks such a scenario may yet be avoided.
Factoring in the numbers Dean points out there is scope GDP fell by as much as 1.0% in the December quarter, though her estimate of a flat outcome has been retained for today at least given there is balance of payments and government expenditure data to be released tomorrow.
On the back of today’s numbers, Hanlan has returned to his previous forecast for GDP and expects the December quarter to show a fall of 0.2%, while on year-on-year terms the bank now expects an increase of 0.8%. McIntyre is forecasting a contraction in December quarter GDP of 0.5%, bringing the annual rate to growth of 1.0%, down from 2.5% previously.
The other issue surrounding the economy, according to TD Securities senior strategist Joshua Williamson, is inflation is again appearing to be something of a problem, as the TD Securities/Melbourne Institute Inflation Gauge rose by 0.7% in February after an increase of 0.8% in January.
As Williamson points out, the latest numbers mean for the 12 months to the end of February the Inflation Gauge rose 3.1%, the first time in four months the increase in annual terms has been above the Reserve Bank of Australia’s (RBA) target band of 2-3%.
Williamson notes while inflation is now lower than was the case during much of last year the pace of decline is not really significant. As well, the data suggest there is some pass through of higher prices on the back of the recent significant falls in the Australian dollar, meaning the process of locking in a comfortably lower inflation rate will likely take longer than previously expected.
The group’s global strategist Stephen Koukoulas suggests the data imply the RBA may be less inclined to move further on interest rates for the time being, preferring instead to pause to allow the current fiscal and monetary policy stimulus to work its way through. Having said that, Koukoulas remains of the view the problems of the global economy mean further interest rate cuts by the RBA will still occur.