Profit growth drops amid household spending crunch Michael ReadEconomics correspondent
Jun 4, 2024 – 1.17pm
Profit growth fell sharply at the start of the year as a spending slowdown caused conditions in consumer-exposed sectors like retail, hospitality and wholesale trade to deteriorate.
Earnings outside the resource sector increased by just 1.6 per cent over the past 12 months, the Australian Bureau of Statistics said on Tuesday. The figure was the lowest rate of profit growth since the COVID-19 lockdowns in 2021 when earnings went backwards.
Over the past year, earnings declined across the manufacturing, wholesale trade and transport sectors, and barely increased across the consumer-facing retail and hospitality industries, despite accusations of profit-gouging from the union movement.
But the slowdown will not be enough to bring forward rate cuts amid fears inflation has stopped falling, with Reserve Bank of Australia chief economist Sarah Hunter last week conceding price pressures remained strong.
The main culprit for the decline in profit growth was the slowdown in consumer spending. Demand has been weak by historical standards for well over a year, as households grapple with high inflation and rising interest rates.
Announcing a 3.75 per cent increase in award wages on Monday, the Fair Work Commission referenced the “substantial decline in profits” in the hospitality industry as a factor preventing it from raising minimum wages by more than inflation.
Mining profits also fell sharply over the past 12 months due to a fall in coal and iron ore exports, which tipped Australia’s current account balance back into deficit in March. The price Australia received for its exported goods fell by 10 per cent over the past year, the ABS said.
The figures will feed into the March quarter national accounts on Wednesday, which economists expect will show the economy expanded by just 0.2 per cent in the three months to March and 1.2 per cent over the past year.
Outside the pandemic, it would be the slowest rate of annual economic growth since the dotcom bubble burst in 2000.
Treasurer Jim Chalmers said softening conditions justified his decision not to cut spending in last month’s federal budget, despite calls from economists for him to do so to help the Reserve Bank of Australia.
“It would have been crazy to tighten the screws even further on a soft economy and on people who are already doing it tough,” he told Parliament.
KPMG chief economist Brendan Rynne said the figures released on Tuesday showed the Australian economy had been “a heartbeat away from a recession” due to anaemic household spending growth.
“In normal circumstances this weakness in economic conditions would induce the RBA to adopt loose monetary policy settings to stimulate activity.
“However, with inflation still sticky and showing this ‘last mile’ down to the target band is a much harder road, KPMG expects the RBA to still sit on its hands for at least another quarter until the trajectory of headline and core inflation becomes clearer,” he said.
The drop-off in household spending has already triggered recent profit warnings at retailer Baby Bunting, building materials supplier James Hardie and car dealer Eagers Automotive.
A second ASX-listed car dealer, Peter Warren Automotive, blamed strained household finances for a sharp downgrade in profit guidance last week, with customer demand for new vehicles falling sharply.
Fund managers are bracing for more profit downgrades amid the steady unravelling of pricing power among some of the sharemarket’s major listed companies.
Commonwealth Bank economist Stephen Wu said the weakness in the company accounts indicated there were downside risks to Commonwealth Bank’s forecast for GDP to eke out a 0.1 per cent gain in March.
Treasury secretary Steven Kennedy on Monday said the March quarter national accounts would be “very weak” as households prioritised essential spending.
“It is clear that growth in household spending has softened considerably as a result of inflation and elevated interest rates,” Dr Kennedy has told Senate estimates.
The ABS said households were cutting back on travelling overseas to save money, with services imports falling for a second consecutive quarter as consumers holidayed locally.
Despite the pullback in overseas travel, foreign trade will subtract a hefty 0.9 percentage points from March quarter GDP growth since imports grew considerably faster than exports.
This will be offset by private sector inventory investment, which should add about 1 percentage point to GDP, and recurrent government spending, which will add 0.2 percentage points.
KPMG’s Dr Rynne said the increase in imports was mainly consumer goods that firms would like to sell to their customers.
“These imports have allowed retailers to restock after Christmas and the end of year sales period; however this new stock has not been sold as consumers continued to pull back on spending during the first quarter of 2024, resulting in a build-up of inventories across the country,” Dr Rynne said.
While growth in the private sector wages bill has also slowed considerably alongside a softer jobs market, salaries have been increasing faster than profits for most of the past two years. Salaries increased by 6.6 per cent in the 12 months to March.
Citi chief economist Josh Williamson said the economy was slowing more quickly than the RBA expected.
“The RBA should view the slowdown as evidence that monetary policy is working to create a better balance of supply and demand,” Mr Williamson said.
