Business inventories decreased 0.9 per cent in the June quarter in seasonally adjusted terms, below market expectations for a 0.3 per cent increase, according to the Australian Bureau of Statistics. The lower inventories - recorded across all sectors - could be pointing to businesses preparing for weaker consumption.

NAB economist Kaixin Owyong said the large drag from inventories pointed to a "substantial downside risk to NAB’s forecast of 0.5 per cent growth in GDP in the quarter and an even larger downside risk to the RBA’s forecast of a 0.8 per cent increase''.

"This would be a major disappointment to the RBA and suggests that the RBA will have to downgrade its outlook further in the November Statement on Monetary Policy.''

Westpac's Andrew Hanlan said the effect of lower inventories on second-quarter GDP was a sizeable drag of -0.6 percentage points – rather than the -0.2 percentage points anticipated.

The market is expecting GDP to come in at 0.5 per cent for the June quarter and 1.4 in the year to June.

Prime Minister Scott Morrison said this year's federal budget acknowledged "that we would be facing a very difficult quarter."

"I suspect the June quarter results will be soft, but what matters is the plan that is already in place," Mr Morrison said.

The seasonally adjusted estimate for companies' gross operating profits rose just 4.5 per cent in the June quarter, above the Bloomberg consensus of economists' forecasts for a 2 per cent increase, driven mainly by profits in the mining sector.


The mining sector showed the strongest surge in gross profits, up 10.9 per cent in seasonally adjusted terms due to much higher commodity prices.

However the manufacturing sector saw profits fall 3.5 per cent in seasonally adjusted terms.

JP Morgan's Mr Jarman said that while inventories were weak and would hurt the expenditure measure of GDP, company profits were robust, suggesting income and production measures of GDP "should fair a bit better."

"Still it seems hard to avoid the conclusion that the economy was weak in the second quarter.

"Policymakers are keen to paint 2019 as a game of two halves, given that significant stimulus started to flow in the third quarter, in the form of 50 basis points of RBA rate cuts, and new tax offsets for low and middle-income households."

Monday's figures also showed that wage and salary payments accelerated in both quarterly terms, up 1.4 per cent, and annual terms, up 4.7 per cent. Mr Jarman said this also pointed to a stronger income measure of GDP as opposed to expenditure side.