Inventories take big hit

Drop of 0.9pc likely to cruel RBA’s GDP forecast

BUSINESS inventories fell sharply in the June quarter, driven mostly by retail stocks and pointing to a large downside risk to GDP.

Business inventories were down 0.9 per cent, reversing a 0.8 per cent increase in the first quarter, the Australian Bureau of Statistics announced yesterday.

NAB economist Kaixin Owyong wrote that the decrease in inventories would subtract 0.6 percentage points from gross domestic product figures set to be released tomorrow, making the Reserve Bank of Australia’s forecast of 0.8 per cent GDP growth unlikely.

“This would be a major disappointment to the RBA and suggests that the RBA will have to downgrade its outlook further in the November Statement on Monetary Policy,” Ms Owyong wrote.

The fall in inventories was driven by retail stocks, but all industries except utilities reduced stock holdings in the quarter, she wrote.

Company profits did pick up in the June quarter as strength in the mining sector outweighed weakness in manufacturing.

Seasonally adjusted gross operating profits at Australian companies rose by 4.5 per cent in the three months to June 30, beating consensus expectations of a 2.0 per cent rise, driven by a 10.9 per cent increase in mining profits.

Wages and salaries were up a seasonally adjusted 1.4 per cent.

Westpac economist Andrew Hanlan (left) called the results a mixed bag, but said “on balance, the surprise is to the downside”. The weakness in inventories was a “sharp downside surprise,” he wrote, outweighing the “robust” increase in wages.

JP Morgan economist Ben Jarman wrote that the decrease in inventories suggests weakness in the production side, and “it seems hard to avoid the conclusion that the economy was weak in 2Q”.

The real possibility of a negative GDP growth makes it harder to sell the idea that recent stimulus will prove sufficient, Mr Jarman wrote.

The Reserve Bank is likely to hold the cash rate this week as it observes the effect of its cuts in June and July, though a pile-up of dismal economic data may hasten the need for a further reduction.

Economists expect the central bank’s board to maintain a wait-and-see approach at today’s monthly board meeting, where members will consider whether recent easing and federal tax stimulus have given the economy the desired boost.