Q2 inventory drawdown to weigh on Australian GDP

For those tracking GDP, the inventory number stands out as the most significant release, given that private non-farm inventories are set to subtract 0.3 percentage points from the national accounts due on Tuesday. The decline was centred on mining inventories, suggesting a probable compensating increase from resources exports in the same GDP release, which may soften the impact on the headline growth figure despite the inventory drag. Private sector credit growth came in below expectations, indicating a slowdown in borrowing that aligns with the Reserve Bank's cautious assessment of spending. Regarding profits, the contrast between a robust mining recovery and a weak non-mining outcome — notably in financial and insurance services — highlights broad sectoral divergence, and the more modest 0.9% profit gain after inventory valuation adjustment implies that part of the headline strength reflects valuation, not operational improvement. Overall, the figures keep attention fixed on the upcoming GDP release to gauge how these opposing forces balance out.

Australian data for July and Q2:

Key figures:

• Private sector credit in Australia increased 0.6% month over month in July, missing the 0.7% estimate and falling from 0.8% in June, as the annual rate slipped to 8.4% from 8.5%.
• Company operating profits for the second quarter climbed 1.8% sequentially, short of the 2.0% expected but recovering strongly from a 1.3% drop in the first quarter.
• Business data indicate private non-farm inventories declined 0.2% in Q2, far below the anticipated 0.5% gain, and will deduct 0.3 percentage points from real GDP.
• The inventory decrease was focused on mining, hinting at a potential rebound in resources exports within the same GDP release.
• Mining sector profits surged 6.8% quarter on quarter, whereas non-mining profits dropped 1%, pulled lower by a notable fall in financial and insurance services.
• Following the inventory valuation adjustment, profit growth was a more subdued 0.9% on a quarterly basis.

Bottom line: Both credit expansion and corporate profits underperformed forecasts yet improved compared with the previous period, particularly profits which staged a strong rebound from Q1's decline. The inventory shortfall is the more significant figure for markets given its timing — a negative reading versus a projected 0.5% increase indicates a drag on the GDP release scheduled for later this week.