Plunging corporate profits may put economy in reverse

The end of the commodity price boom and slowing demand has driven the biggest quarterly collapse in corporate profits on record, raising fears the economy may have contracted.

A surprise plunge in corporate profits and inventories has cast a shadow over the economy’s prospects in the June quarter. Picture: John Grainger

The biggest quarterly drop in business profits on record risks driving the economy backwards, even as companies’ total wages bill climbed amid a still red-hot labour market.

A 21 per cent collapse in quarterly mining profits – which account for almost half of total corporate profits and have boomed over the past year – underpinned the shock 13 per cent drop in total gross operating business profits, as a faltering Chinese economy and slowing global demand pushed commodity prices lower.

Declining profitability was not confined to the resources sector, with operating profits in non-mining companies falling by 5 per cent in the June quarter, the Australian Bureau of Statistics figures show.

Total quarterly company profits were 12 per cent down on a year earlier – the first annual drop since 2016 and the largest year-on-year fall in more than a decade.

ANZ head of Australian economics Adam Boyton said there was a risk Wednesday’s national accounts would show real GDP growth in the June quarter below his already low forecast of 0.2 per cent.

Mr Boyton said he would not rule out the possibility of a negative GDP growth figure.

The gloomy picture comes ahead of what is expected to be a difficult back half to 2023 as soaring interest rates and cost-of-­living pressures drag on household spending.

The Reserve Bank board at its meeting on Tuesday – governor Philip Lowe’s last – is widely expected to hold the cash rate steady at 4.1 per cent for a third consecutive month, although economists think Dr Lowe’s statement will keep open the option of further rate rises in coming months if inflation proves stickier than feared.

In contrast to profits, wages paid in the June quarter lifted by a further 1.8 per cent from March, and were nearly 10 per cent higher than a year ago as employment and hours worked increased through the three months, alongside rising pay rates.

Business Council of Australia chief economist Stephen Walters said there were some “truly big shifts” in the economy, as the record mining profits of the past year were deflating and the post-Covid rebound ran out of puff.

“We had commodity prices at record highs and interest rates at record lows, and both have rapidly reversed. So I’m not surprised profitability is being squeezed,” Mr Walters said.

As economic growth grinds down, Mr Walters said, the Albanese government’s next round of workplace reforms “are adding to the burden of business at the very time we should be making it easier to do business, not harder”.

Every industry, besides accommodation and food services, reported a higher quarterly wage bill – including a 2.6 per cent increase in salaries paid to mining workers, and a 2.8 per cent lift in wages in the constriction sector.

Westpac senior economist ­Andrew Hanlan said the broad weakness in business profits “reflects the impact of patchy sales conditions and margin squeeze, with many firms facing rising input costs and limited ability to pass on those higher costs”.

There was also a surprise 1.9 per cent drop in non-farm business inventories, which analysts said by itself would subtract 1 percentage point from real GDP growth in the June quarter.

Gross operating profits in the hospitality industry dropped by an even larger 24 per cent, while the real estate and transport sectors recorded falls of 11-12 per cent.

Financial and insurance firms, however, enjoyed a 16 per cent jump in profits in the June quarter, the ABS data shows, while construction sector profits inched up by less than 1 per cent and retail trade by 1.8 per cent.

Jarden chief economist Carlos Cacho said net exports and spending data on Tuesday would provide more insight, but there was a “real risk” the economy contracted through the June quarter.