Over the past year economy-wide profits grew by just 0.4 per cent – the weakest financial year outcome in the 17-year history of the series apart from the GFC period. No wonder businesses are seeking to cut costs and are refraining from hiring new staff.

The good news, as shown by other data out today, is that inflationary pressures are contained, making it an easy job for the Reserve Bank to leave interest rate settings on hold. We expect the Reserve Bank to stay on the interest rate sidelines for the remainder of the year, providing the economy with a shot of much-needed stability.

Given all the uncertainties – whether it be the global economy, domestic politics, the proposed introduction of the carbon tax or interest rates – it is far from surprising that businesses aren’t in the mood to hire at present. In trend terms job ads have now fallen for five months in a row. The silver lining could be that productivity will start to improve as businesses focus on working their existing employees harder or more efficiently.
The sharp increase in inventories in the June quarter is good news for economic growth. However, as we’ve seen in the past, large increases in stocks tend to be unwound, raising questions about future production, employment and overall economic growth. While the mining sector arguably needed to rebuild inventories to meet higher demand, clearly the same can’t be said for most other sectors, especially wholesale and retail trade together with food services.

What are the implications for interest rates and investors?
The Reserve Bank can rest easily on the interest rate sidelines. There is no need to rush ahead with rate cuts, while rate hikes are certainly off the agenda.

CommSec has reviewed the profit performance of big listed companies. Of the ASX 200 companies producing full year accounts, aggregate profits rose by 32 per cent in 2010/11. However the mining sector (especially BHP Billiton) drove the result. The ABS series shows that smaller companies, especially those outside the mining sector, struggled to lift profits over the past year. The multi-speed nature of the economy is clearly on show with the mixed results on profits across industry sectors.

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