That’s not a two speed economy! This is a two speed economy!

September 14, 2011

FOREX, RBA and Interest Rates

Joint post Greg McKenna and M-Bay

Yesterday’s NAB business survey screamed loudly of a two-speed economy but before we get to the break up and implications of that our newest member of the Lighthouse team, M-Bay, has put together some data now that the Australian company reporting season has finished which highlights the nature of the bifurcation of the Australian economy.

When you look at the breakup of company profits you see there is, or at least we reckon there is, a strong correlation between Total Gross Company Profits over the last few years and those of mining companies. Clearly this is hardly a revelation given what’s going on in our economy at the moment and not something readers will be surprised by but something that we believe further illustrates the difficulties faced in managing an economy with such diversity in performance across industries.

The National Accounts released recently showed that a big contributor to the Quarterly GDP was the 6.7% quarterly increase in company profits, but delving into these company profit figures we find that Mining companies had a quarterly profit growth of  15% which translated to 36% of total profits. The remaining 64% of company profits recorded (in aggregate) just 2% growth in the quarter.

Year on year is similar, although the story does not look so strong. Total company profit growth was 0.2% with all companies excluding mining recording a decline of 0.3% over the twelve months to June 2011. Mining again supported the economy with 0.9% growth for the year.

But if we look at the following chart we can see profits in dollar terms with the Total figure mapped against the right hand axis and all industry based profits on the left. According to this profits are at record levels in total and for mining. The only other sectors at record levels are Transport and Professional Services. All others are either declining or stagnant at around the 5 year average. Poor manufacturing, that we know is struggling and is the second largest individual sector, is down 25% since the peak in 2008, and in the last twelve months has recorded a 27% decrease.

With the Materials and Energy sub-Indexes of the ASX 200 making up only 34-35% of the total capitalisation of the Australian share market is it any wonder that in a world where only mining seems to be making any decent returns the Australian stock market is doing about as well as the Australian economy not as well as the AUD/USD exchange rate.

Turning to yesterday’s release of the NAB Business Survey for August we see that there is a definite reinforcement of the trend we are seeing above in company profits. In deed we find the recent run of data depressing insofar as it highlights the fact that mining and mining related companies are taking a bigger slice of the economic pie while the rest of the economy suffers.

If there were two and only two economic releases I was allowed to look at each month to gauge what’s going on in the Australian economy they would be the NAB Confidence survey and the Westpac – MI Consumer sentiment survey. The former was released yesterday and the latter is out today.

Readers know that in relying on these indicators we have been able to forecast, with reasonable accuracy, what we thought was in prospect for the Australian economy and what is currently coming to pass. This is not to blow our own trumpets here because we have been doing this now for getting close to 25 years and we know that after every rooster period comes the feather duster but we think it important in the context of highlighting the predictive power of yesterday’s NAB Business survey.

NAB Chief Economist Alan Oster wrote in the press release,

Business confidence dropped sharply in August, with heightened global uncertainty, large falls in equity markets and the fear of debt market contagion. Confidence deteriorated across all industries, except recreation & personal services and construction…On that front, business conditions in August edged down, but only marginally. Forward orders remained around current (depressed) levels and there was little change in capacity utilisation…The multi-speed nature of the Australian economy was again highlighted in the Survey. Manufacturing, retail, wholesale and construction conditions remained very weak. Indeed manufacturing conditions continued to decline sharply and there was significant labour shedding in that sector (employment index -25 points). Against that, mining and the service sectors generally remained strong.

Not exactly the prettiest picture that we have seen from this survey but equally as Oster stressed on Bloomberg neither is it as dire as it was in 2009.

But the question is how weak is the Australian business sector going to become? To the extent that the fall in conditions was driven by profitability and trading conditions we are concerned that, as we wrote yesterday, the recovery is some way off. Equally the company profit data and the Business survey simply highlight the extent to which we are hostage to China and it’s ability to keep growing through all the market turmoil.

We are long-term China bulls but this does not mean that China is immune to the cycles of business and economies and we feel at some point there is going to be an inevitable mis-step where production gets ahead of demand or where speculation runs itself into a bust. So far so good and we keep our fingers crossed.

This blog is for information only and does not constitute advice. Neither Greg McKenna nor Lighthouse Securities has taken your personal circumstances, objectives or financial situation into account. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation or needs.

If you do need economic, investment or financial advice we are happy to help.

Please Email the team at Lighthouse at or Greg directly on

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