Tuesday, 19 August 2014

Where are the profits?

You'll have seen the gist of today's Prefu (Pre-Election and Fiscal Update) elsewhere, and the only thing I'd add about the coverage is that it's rather silly for commentators to be drawing fine distinctions between the $375 million fiscal surplus for 2014-15 that Bill English talked about in the Budget in May, and the $297 million he's expecting today.

That's because the surplus is the difference between two enormous numbers, each around the $72-73 billion mark. The teentsiest mismeasurement or timing variation in the big numbers can therefore make the surplus jump all over the place. For example, if tax was 0.1% higher and expenditure 0.1% lower, the surplus would go up by around $145 million. So changes of some $75 million between what Bill expected in May and what he's expecting now are completely inconsequential.

There is something in the Prefu, however, that generally doesn't get reported on, but is genuinely important. And that's the government's expectations for profits (which it needs to make a stab at, in order to figure out likely company tax). It's doubly important, in that we don't have regular updates from Stats on how company profits are travelling - many developed economies have official quarterly data, but we don't - so any info at all is quite handy.

Here's the relevant table from the Prefu (I've added percentage changes to the original). The numbers are millions of nominal dollars.

'Operating surplus' is the profit measure. You can see, for example, the big impact that high commodity prices have had on farm profitability in the March year just ended. And profits in the rest of the economy also did well in the year to last March (+8.3%) and are expected to do decently (+7.0%) in the year to next March, too.

And then they fizzle out. Expected profit growth is pretty minimal in subsequent years. No matter how you come at it, you keep arriving at the conclusion that in 18 months or so we're going to have to find something beyond the Canterbury rebuild and high commodity prices for our next trick.

It also makes me wonder about the valuation of our stock market, which (according to ThomsonReuters estimates) is currently trading on a p/e ratio of 16.1 times earnings - the sort of ratio that you'd associate with a reasonably upbeat view of corporate profit growth. Either the outlook for profits is better than the government thinks, or investors are paying on the high side. Given the way the market has been on a gentle slide in recent weeks (as shown below in the graph of the NZX50 index, from the NZX's website), could be that investors are beginning to have somewhat more realistic expectations.

Finally, the Prefu table gives us some idea of who's benefiting from the good times, at least in the sense of telling us how much of the growing national income is going to employees. In the year just finished in March, farmers and business owners did best. But in the current March year, and over the forecast period out to March '18, there's nothing in it. Compensation of employees keeps pace with growth in the economy as a whole. In election years - well, actually, all the time, come to think of it - there'll always be someone claiming that the other fellow is scooping the pot while you're slaving for your pittance. Not on these figures, he isn't.

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