Businesses suffer third quarter profits dip

Ten out of 15 industries experienced a drop in profits in the third quarter and 12 out of 15 industries suffered a decline in sales, according to a new ANZ report.

According to the report, company profits fell 1.5% in the third quarter of 2010. The volume of final sales in the economy was also weak, falling 0.9%.

The report states: “Today’s data is not good news for Q3 GDP… For policy-makers, Wednesday’s data is historical.”

The results confirm the findings of ANZ’s Australian Economics Toolbox report, which predicts Australia is likely to “hit a soft patch” in Q3 amidst rising interest rates.

The report says public and private investment, housing construction and exports – all of which are interest-sensitive sectors – appear to have hindered GDP growth in Q3.

According to the report, construction work fell by 2.1% in Q3, predominantly driven by a 6.1% fall in residential building work. Non-residential building work rose 1.5% quarter on quarter.

“Higher interest rates and the unwinding of the expanded First Home Owners Grant was expected to dampen housing construction, albeit not to the extent that appears to have actually occurred,” the report states.

“The 6.1% decline in residential building work done in Q3 was a deeper fall than we had been expecting.”

“Weaker private business investment in Q3 was also not unexpected, given the recent falls in non-residential building approvals.”

The report states that even if GDP growth slows in Q3, the outlook for 2011-12 is “reasonably robust” despite the increasing divergence between the mining sector and other interest-sensitive sectors.

“Australia’s strong investment outlook remains intact, with the latest capital expenditure survey indicating especially strong mining investment intentions for 2011,” it says.

Ivan Colhoun, ANZ head of Australian economics, says Australia’s two-speed economy means businesses should focus on the growth of their particular industry.

“It’s quite varied when you’re talking about the Australian economy as a whole. The consumer sector and housing construction [sector] are nowhere near as strong [as other sectors],” Colhoun says.

“The next two to four months will tend to be on the soft side for consumer spending, housing and construction approvals.”

However, ANZ predicts Q3 GDP to receive a substantial contribution to growth from household consumption, with retail sales up 0.6% and strong employment supporting stronger services spending.

“Strong employment in the quarter should support household incomes. Indeed, while we can’t discount the risk of a negative GDP number, we would be surprised if the economy went backwards in a quarter when… 104,000 full-time jobs were created,” the report states.

Colhoun doesn’t expect another wave of interest rate rises until mid next year, a claim substantiated by the report.

The report states: “The RBA may well be out of action throughout the first half of 2011, especially if recent anecdotal evidence of weaker consumer spending and softening housing market conditions in the wake of the November tightening is maintained.”