Q2 company profits surge in Australia

SYDNEY: Australian companies enjoyed the biggest boost in profits in a decade last quarter led by a record 63% jump in the mining industry as strong Asian demand fuelled skyhigh prices for iron ore and coal.

Company gross operating profits climbed 18.9% in the second quarter, compared with the first when they increased by 4.3%. That was triple the market forecast and took profits to A$68.5bil for the quarter and the data does not even include profits in Australia’s lucrative banking sector.

“More profits mean more investment, more jobs, higher wages and rising tax receipts,” said Brian Redican, a senior economist at Macquarie. “It shows that income growth in the economy is extraordinarily strong.”

Indeed, Monday’s data showed wages and salaries in the companies covered jumped 2.2% in the second quarter, again led by a 7.4% rise in mining. That should help support household consumption even if consumers chose to save more in the face of global uncertainties.

All of which augured well for the income side of Australia’s gross domestic product (GDP) report, due tomorrow.

Analysts have been looking for GDP to rise around 1%, double the first quarter gain. That would lift growth for the year to 2.9% and mark 19 straight years without a recession, a track record few other nations can match.

However, yesterday’s data contained a downside risk to forecasts since company inventories unexpectedly fell 0.5% in the second quarter. This meant the change in inventories might have subtracted about 0.6 percentage points from growth, when analysts had looked for a neutral outcome.

The final pieces of the GDP jigsaw are out today with the release of exports and public spending figures

The Reserve Bank of Australia (RBA) remains confident the economy can extend its remarkable run and is forecasting GDP growth of 3.25% this year, rising to 3.75% next and 4% in 2012.

That was one reason it led the developed world by lifting its cash rate 150 basis points to 4.5% between October and May, and retains a modest tightening bias.

Investors, however, seem obsessed with the danger of a double-dip recession in the US and fear Australia will not be totally insulated.

As a result the market is pricing in no chance of another rise in interest rates this year and even a small risk that rates would be cut by year-end

“Markets seem intent on pricing the next RBA move as a cut but we would argue that this is misguided,” said Michael Turner, a fixed income strategist at RBC Capital Markets.

“A continued stream of proposals for large scale resource projects has amplified an oft-heard but oft-forgotten sentiment worth repeating – Australia is a resource rich country in a resource boom,” he added. — Reuters

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