Friday, 22 May 2015

Where are the profits?

Yesterday I wrote up the big themes from the Budget (and a few of the minutiae), but didn't have time to write up one of the more interesting forecasts in the documentation (and you may well have a devil of a time finding it yourself, as it's in the 'Budget Economic and Fiscal Update 2015 Additional Information' document, which is the befu15-11of11.pdf file in all the bumph - you can find it here).

It's the forecast for profits - strictly speaking, net operating surplus, but same diff - for agriculture and for the rest of the economy over the next four years (years ending in March). I've extracted the numbers (from Table 3) and put in the percentage changes, and here they are.


Three thoughts, assuming the forecasts are mostly on the mark.

One, agriculture looks to be doing it tough over the next couple of years, and you can see why farming cropped up as a topic at the Reserve Bank's financial stability report last week.

Two, it's not much of a profit boom for the rest of the economy, either, is it? You'd think that in a economy of moderate wage growth, low interest rates, and ongoing economic growth averaging 2.8% a year, there'd be more of a profit gusher than this.

And three, our share market has risen to quite fancy levels on measures such as p/e ratios. Those expensive valuations may be explicable in a world where asset prices of all kinds have been inflated by globally cheap money, but shares priced as growth stocks don't make much sense if this is the profit outcome that's actually going to unfold.

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