It looks like Australian economic growth was strong in early 2018

Chris Hopkins/Getty Images
  • The latest piece of Australia’s Q1 GDP jigsaw puzzle arrived today with the release of business indicators from the Australian Bureau of Statistics (ABS).
  • The news was unilaterally good with profits, wages and inventories all increasing from the December quarter last year.
  • Business inventories grew by 0.7%, and look set to add around 0.2 percentage points to quarterly GDP.

The latest piece of Australia’s Q1 GDP jigsaw puzzle arrived today with the release of business indicators from the Australian Bureau of Statistics (ABS).

The news was unilaterally good with profits, wages and inventories all increasing from the December quarter last year.

According to the ABS, gross operating profits rose by 5.9% during the quarter in seasonally adjusted terms, leaving the increase on a year earlier at 5.8%.

That was well above the 3% increase expected by economists, driven by stronger profit growth in the mining sector.

“Mining profits led the way, as expected, on the back of higher commodity prices and increased sales,” said Andre Hanlan, Senior Economist at Westpac Bank.

However, he said non-mining profits also outperformed expectations by some margin, lifting by 3.4% compared to estimates for a smaller increase of 0.5%.

“[There was] strength across construction, manufacturing, retail, as well as a partial rebound in professional business services,” Hanlan said.

“Taken at face value, this describes a more robust opening to 2018 than we envisaged, although we caution that this data is volatile.”

CBA

Mirroring the strength in profits, wages and salaries paid to workers also beat, rising by 0.8% in the quarter and 5.1% over the year.

“This measure of wages and salaries is affected by growth in jobs, growth in wages for each job and the composition of jobs in the economy,” said Kristina Clifton, Senior Economist at the Commonwealth Bank, adding it is “essentially a measure of household income growth”.

However, rather than stronger wage growth, Clifton said most of the annual increase was driven by stronger hiring levels over the year.

“The growth in wages and salaries over the past year has been largely driven by jobs growth,” she said.

“Growth in wages for people who already have jobs has been stuck around the 2% mark for the past two years.”

CBA

Along with stronger profits and employee incomes, business inventories also grew more-than-expected, lifting by 0.7% from the prior quarter.

As Clifton explains, this will add around 0.2 percentage points to quarterly GDP in the March quarter.

“Inventories rose in utilities (4.1%), wholesale trade (3.5%) and manufacturing (0.5%) in the quarter,” she said, noting this offset declines in all other sectors.

“On our calculations, inventories should add around 0.2ppts to Q1 GDP.

“At this stage we think Q1 GDP will come in at a solid 0.8 to 0.9%.”

Hanlan at Westpac said the surprise lift in inventories means the risks to quarterly GDP growth are now to the upside.

“This suggests risks to our Q1 GDP growth forecast of 0.9% quarter-on-quarter and 2.8% year-on-year are tilted to the upside,” he said.

The ABS will release data on net exports and government demand on Tuesday, the last of Australia’s partial GDP inputs.

That will be followed by Australia’s Q1 GDP report, released on Wednesday, June 6. Based on the partial indicators received so far, it’s looking pretty good.

NOW WATCH: Money & Markets videos

Want to read a more in-depth view on the trends influencing Australian business and the global economy? BI / Research is designed to help executives and industry leaders understand the major challenges and opportunities for industry, technology, strategy and the economy in the future. Sign up for free at research.businessinsider.com.au.