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Australian company profits are tanking

Gross operating profits at Australian firms continued to nosedive in the first quarter of 2016, according to data released by the Australian Bureau of Statistics (ABS) on Monday.

After seasonal adjustments, profits fell by 4.7% to $59.295 billion between January to March compared to the prior quarter, a figure that was well below expectations for an increase of 0.2%.

The slump left gross operating profits down 8.4% on the same quarter a year earlier. It was the largest year-on-year decline registered since 2012, and was also the lowest quarterly figure since Q1 2010.

According to analysis from George Tharenou, Scott Haslem and Jin Xu of UBS Australia, mining sector profits slumped by 21.7% from a year earlier. There was also weakness in the non-mining sectors which saw profits decline by a smaller 3.3%.

Company profits before income tax fell by 15.1% to $33.527 billion over the quarter following seasonal adjustments, largely offsetting the downwardly-revised 18.8% increase of the final quarter of 2015.

It was the third four in the past four quarters, as shown in the chart below.

Outside of profits, the news was slightly better with inventory levels rising 0.4% in volume terms, topping expectations for nil change over the quarter.

“Private non-farm inventories unexpectedly rose in Q1, increasing by 0.4% q/q after an upward revision in Q4 to flat, wrote UBS. “Hence, for Q1 real GDP, inventories will contribute a decent 0.14%” percentage points to quarterly GDP.

As a result, Tharenou, Haslem and Xu believe that there are upside risks building for Australia’s March quarter GDP figures released on Wednesday this week.

“Today’s Q1 GDP building blocks were mixed, but overall on the positive side,” they wrote.

“An increase in inventories will add to growth, and while profits dropped further, there was a modest gain in wages, as well as a notable spike in sales. So while we stick to our forecast for real GDP of 0.7% q/q & 2.7% y/y, there is now clear upside risk.

“We await the final partial data (due tomorrow) which is expected to show a big boost from net exports, as well as a modest rise in public demand.”

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