Australian Inventories Drag on Economy in Q2

Australian businesses added to inventories at a slower pace last quarter amid subdued sales, suggesting stocks subtracted more from economic growth than first thought.

Other government data on Monday showed gross operating profits at Australian companies rose modestly in the second quarter, with strength in construction and mining offset by a steep fall in the transport sector.

Inventories rose 0.4% in the quarter, well down on the first quarter's 1.5% increase and a potential blow to growth in gross domestic product (GDP), due on Tuesday.

"The inventory build-up was much smaller than in Q1, so that implies quiet a significant drag on economic growth," said Brian Redican, a senior economist at Macquarie Bank.

Analysts estimated inventories could have subtracted around 0.5 percentage points from GDP last quarter, instead of the 0.2 percentage points many had expected.

"Profits were also softer than expected. It means there's a downside risk to GDP in the quarter," he added.

Analysts had been expecting the economy to grow around 0.6% in the second quarter, already a big step down from the first quarter's rapid 1.6% pace.

Still, figures covering July and August have generally been stronger, with consumption making a notable come back and employment robust.

Separate survey data on Monday showed job advertisements remained close to record highs in August, pointing to solid demand for labour.

Official employment figures for August are due on Thursday and the median
forecast is for another solid rise of 18,750 in net new jobs. The unemployment
rate is seen holding at a 33-year low of 4.3%.

Inflation Alarm

However, the pick-up in domestic demand was stretching an economy already short of spare capacity after 16 years of uninterrupted growth and generating price pressures.

Earlier on Monday a private-sector measure of Australian inflation showed a second straight month of hefty increases, led by food, rents and house construction.

The TD Securities-Melbourne Institute Monthly Inflation Gauge climbed 0.5% in August, adding to a sizable 0.6% gain in July.

Based on the survey it was possible headline consumer inflation could rise 1.37% in the third quarter, even more than the second quarter's 1.2% jump, said University of Melbourne economist Don Harding.

Such a substantial increase would be alarming for the Reserve Bank of Australia (RBA) which had already raised interest rates to a decade high of 6.5% in reaction to the spike in inflation recorded for the second quarter.

"The TD-MI Monthly Inflation Gauge has risen strongly for the second consecutive month, providing evidence that inflation is accelerating," said Joshua Williamson, a senior economist at TD.

"Strong domestic demand adds to the risk that inflation will break out above the RBA's 2 to 3% target band," he added. "To reduce this risk, the RBA will need to raise the cash rate."

The central bank holds its September policy meeting on Tuesday but investors are pricing in no chance of a tightening given the recent turmoil in financial markets.

Williamson suspected the RBA would wait to see the third quarter consumer price report on Oct. 24 to confirm the pick-up in inflation.

"This makes the November 6 Board meeting the first opportunity to raise official interest rates," he said.