Years of begrudging wage rises and screwing the last few cents out of suppliers have come back to bite corporate Australia where it hurts: On the bottom line.
The ASX reporting season that finished on Friday showed the financial year to be the worst since the GFC.
Even with a booming resources sector and strong healthcare stocks, the impact of six years of real take-home wages going backwards has caught up with company profits.
It has been par for the course for management to gain a share price sugar hit – and executive bonuses – by announcing a new round of cost-cutting and holding down wages.
The story of 2018-19, though, is that the short-sighted formula ends up strangling consumption growth and, consequently, profit growth.
The reporting season scorecard kept by AMP Capital chief economist Shane Oliver shows the biggest percentage of companies reporting profit falls in the June half in a decade.
Of ASX-listed companies with a June 30 balance date, 42 per cent reported a worse result than the previous corresponding period – the highest such rate since 2009.
The 58 per cent of companies reporting higher profits compares with 77 per cent at the same time last year.
And, outside resources and healthcare, the companies that did manage a higher profit didn’t do so by much.
Combining the June and December halves for the financial year total also gives the worst result since 2008-09 – another factor that will be reflected in Wednesday’s national accounts.
The weaker profits have inevitably flowed on to dividends. Dr Oliver reports only 49 per cent of companies have increased their dividends, well below the longer-term norm of 62 per cent.
“And 28 per cent of companies have cut their dividends, which is the most in the last seven years, suggesting greater caution,” he says.
There were some spectacular individual company dividend increases, notably in the resources sector, but falling commodity prices raise questions about their sustainability.
Symptomatic of the gap between the successful big resources companies and the rest of the economy, though, was BHP reporting a fat profit and dividend increase, but also boasting about how it had cut costs by 50 per cent.
In part, that means the good resources times are not trickling down to contractors and workers the way they used to.
It’s why Perth’s employment, retail and property markets are continuing to underperform, despite the big miners booming.
Total earnings growth for reporting companies came in around 1.5 per cent, but that was inflated by the resources sector enjoying higher commodity prices and lower costs.
The resources stocks’ averaged earnings growth of around 13 per cent, on Dr Oliver’s count, while the rest of the market was down by two per cent.
What’s chilling about this performance is that it occurred in a relatively benign international environment.
While Donald Trump has been ramping up his trade war with China, our balance of trade has been going gang-busters. It’s likely Australia has recorded its first current account surplus since 1975.
The worry is that if our overall corporate performance and GDP growth have been lacklustre in such good times, a deteriorating international environment bodes ill for this financial year.
For the corporate outlook, earnings downgrades dominated upgrades by more than two to one.
As previously reported, the bright spots that should keep GDP positive are east coast state governments continuing to ramp up infrastructure investment, and improved private capital investment prospects.
But, much like the financial year just finished, that growth is unlikely to feel very positive for the broader economy while consumption remains constrained and the federal government continues to put its pursuit of a budget surplus ahead of fiscal stimulus.