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Unpredictable business inventories and their impact on GDP growth

PUBLISHED

2024-03-04

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Business inventories wield considerable influence over GDP growth, often introducing unpredictability into economic forecasts. While an increase in inventories typically signals positive economic expansion, excessive rises may indicate underlying issues, particularly within retail and household consumption sectors. However, in economies such as Australia's, the volatility of inventory fluctuations extends beyond the retail sphere, prominently influenced by the mining sector.

The recent revelation of a 1.7% decline in December quarter inventories, as reported by the Australian Bureau of Statistics, underscores the complexity of inventory dynamics. While conventional wisdom suggests that such a decrease could impede GDP growth, the reality may prove more nuanced. For instance, despite expectations of stability following a 1.2% rise in the September quarter, the unexpected decline could potentially shave off 0.1 to 0.2 percentage points from GDP in the December quarter.

In Australia, the mining sector emerges as a significant player in inventory fluctuations, overshadowing the impact of traditional retail operations. Notably, the production and sales rates of mining giants like BHP, Rio Tinto, Fortescue, and coal producers including BHP, Whitehaven, New Hope, Stanmore, Peabody, Yancoal, and Glencore exert substantial influence on inventory trends. The 1.7% fall in December quarter inventories can largely be attributed to a $1.6 billion decrease in mining inventories, nearly half of the $3.6 billion overall decline.

Despite the apparent drag on GDP growth posed by declining inventories, several factors suggest a potentially favorable outlook. Favorable weather conditions across key mining regions in Queensland, New South Wales, and the Pilbara, along with robust production and sales performances by mining giants in January and February, hint at a positive narrative. These companies have reportedly ramped up shipments of iron ore and coal to compensate for delayed orders, thus depleting existing stockpiles.

Moreover, other sectors, such as retail and agriculture, also contribute to the intricate economic landscape. Retailing saw a modest build-up of stocks, while disruptions due to storms and wet conditions impacted summer grain and oilseed harvests and exports. Furthermore, fluctuations in company gross operating profits and wages offer mixed signals, reflecting both resilience and volatility within the economy.

As new data on the current account and government finance emerge, uncertainties persist regarding their impact on GDP growth. While trade is anticipated to contribute positively, government finance remains a wildcard, with spending and investment patterns shaping economic outcomes. September's GDP growth of just 0.2% was significantly bolstered by government contributions, underscoring the importance of these factors in economic performance.

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