Firm economy 'driving company profits'

Company gross operating profits rose a seasonally adjusted 2.5 per cent in current prices in the December quarter, to be up 9.1 per cent over the year, the Australian Bureau of Statistics said.

The result was in line with expectations of a 2.5 per cent rise in the quarter.

Estimated business inventories at the end of the December quarter, in seasonally adjusted chain volume terms, rose 0.1 per cent from the previous quarter to $104.835 billion, to be down 1.7 per cent from a year ago.

Economists were forecasting flat result in the quarter.

TD Securities chief economist and strategist Stephen Koukoulas said company profits were bang on expectations.

He said profits rose slightly, consistent with the strength in the economy.

Meanwhile, the small growth in inventories would contribute slightly to gross domestic product (GDP) growth.

However, he said GDP forecasts would not change too much, with the results so close to expectations.

"So, you've got a bit of a boost to offset the minus 1.3 per cent from net exports," he said.

He said the rise in inventories was partly due to softness in the previous two quarters, where there was a slight decline.

"I think what we're seeing is firms are responding to what was a fairly lean level of inventories by boosting production and adding to them in anticipation of a better economic performance through 2007," he said.

UBS chief economist Scott Haslem said the small rise in private non-farm stocks followed falls in the prior two quarters.

As such, the change in stocks will add 0.6 percentage points to the December quarter gross domestic product (GDP) measure.

"Stocks rose in mining, retail and manufacturing, more than offsetting a fall in wholesale trade," he said.

Mr Haslem said that overall, Monday's data was sufficiently close to expectations and that he would leave his forecast for a 0.4 per cent rise in GDP unchanged.

"Within this, we expect to see a solid 1.1 per cent rise in domestic demand, together with a pick-up in the contribution from inventories," he said.

"Key upside risks to this remain public spending, which we forecast a strong 1.3 per cent gain, and non-retail consumption, both have the potential to push the GDP print a little higher.

"Assuming a 0.4 per cent rise, the annual (rate) should slow further to 1.8 per cent per cent from 2.2 per cent in the third quarter, although non-farm GDP should remain around a comfortable 2.5 per cent on an annual basis."

But RBC Capital Markets senior economist Su-Lin Ong said she was surprised at the lack of rebuild in inventories, after the large rundown in the second and third quarters.

She said it may signal less confidence by businesses going forward.

The data suggest some downside risk to Wednesday's GDP data, with inventories adding to growth but by somewhat less than expected.

"We expect fourth quarter GDP to have increased by a modest 0.5 per cent, barely 2.0 per cent in (annual) terms," she said.

"However, the likely modest headline print in the quarter will mask reasonably firm domestic demand with a heavy drag from net exports, (about 1.3 percentage points).

"Capacity constraints continue to limit output growth with annual GDP running at a sub-trend 2-2.5 per cent for several quarters now, but a raft of other indicators suggesting a much stronger economy than the headline GDP data."