Tuesday, 4 June 2013

Where next for Australia?

Yesterday's release of the March quarter data for Australian company profits made for interesting reading. There's been a cascade of other news, too, on actual and planned investment, housing starts, and retail sales, but I like to focus on company profits as a good touchstone for judging how well business is performing. And for investors it is a critical input into forming a view on the value on offer in the Aussie share market.

The headline news you may have seen in the media was that, seasonally adjusted, total company gross operating profits were up by 3.0% in the March quarter, which was rather better than the consensus forecast of a 1.5% increase. Mining profits helped the total (+9.5%) but manufacturing profits were down (-6.6%). On the face of it, not too bad an overall result.

As I've posted before, though, seasonally adjusted statistics out of Australia at the moment are proving to be rather erratic. While the seasonal adjustment process normally deals to a good proportion of quarter to quarter volatility, and the seasonal adjusted numbers are the ones you'd normally reach for, at the moment even the seasonally adjusted numbers have a lot of residual noise in them.

Cue the 'trend' data, which are smoothed to take out even more of the noise and gives us a better view of whatever longer-term underlying trend might be in the numbers. On that basis, the numbers weren't so hot. Total profits were up by only 0.4% for the quarter (rather than 3.0%), the supposed lift in mining profits disappears (a -0.5% fall instead of a 9.5% rise), and manufacturing still appeared weak, though nowhere near as badly (profits down -1.0% rather than -6.6%).

The trend data feel more on the mark, given the slowdown underway in the Australian economy and the impact on profits of the high Aussie dollar. You'd expect profits to be harder to come by in this environment, and the small advance in profits on a trend basis feels more consistent with reality.
To give you a feel of the numbers involved, and still on a trend basis, total company profits in the March quarter amounted to A$62.6 billion, of which mining accounted for A$17.85 billion (28.5% of the total). The Australian Bureau of Statistics doesn't do a 'non mining company profits' number, but it's easy to do for yourself: the non-mining sectors earned A$44.7 billion (71.5%).

On the mining side, the peak of the boom is well past, at least in terms of profits. Profits peaked in September 2011, at a little shy of A$24.8 billion, and today's mining profits are now down some 28% from their peak levels.

On the non-mining side, profits have been rising, but very slowly: they barely grew in the year to March '11 (+0.2%), were up 1.9% in the year to March '12, and up 3.1% in the year to March '13. You could, if you were a very determined optimist, read this as a pickup in profits growth, but the reality is that these are very sluggish numbers for growth in company earnings in recent years.

You're consistently left with the picture of a two-speed Australian economy (boomtime resources, lacklustre elsewhere) becoming a one-and-a-half-speed economy (the resources coming off the boil, but still lacklustre elsewhere). The other data that have appeared in recent days give you much the same feel.

Australia's still a long way from any real trouble - the most downbeat of the main forecasters, as far as I can judge, is Westpac, but even on their forecasts there is only an ongoing slowdown in growth from 2.5% this year to 2.3% next year, rather than (say) an outright recession. Other forecasters tend not to have as much of a slowdown, or have a pickup happening earlier.

Let's hope the more optimistic views come to hand. While we have a friendly rivalry with the Aussies - and I for one am still revelling in last nights' 56-18 demolition of the Broncos by the Warriors - we have strong economic reasons to want a robust Australian economy, and a pickup from its current slowish patch sooner rather than later.

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