Aug. 31 (Bloomberg) -- Australian business profits fell in the second quarter by the most since 2003 and inventories tumbled as earnings slumped at mining and building companies.

Gross operating profits slipped 7.8 percent in the three months ended June 30 from the first quarter, the Bureau of Statistics said in Sydney today. The median estimate of 18 economists surveyed by Bloomberg was for a 4.5 percent decline.

Australian copper and gold producer Oz Minerals Ltd. and Qantas Airways Ltd. are among companies that posted losses in the first half of this year as the nation’s economy slowed. Inventories held by companies fell 3.4 percent in the quarter, the biggest drop since the bureau began measuring the figure in 1985, today’s report said.

“The fall in inventories was pretty big -- it’s going to slice a big chunk out of gross domestic product” in the second quarter, said Stephen Walters, chief economist at JPMorgan Chase & Co. in Sydney. Still, while the availability and cost of credit is squeezing some companies, “they’re still profitable,” he added.

The Australian dollar fell to 84.10 U.S. cents at 12:39 p.m. in Sydney from 84.29 cents just before the report was released. The two-year government bond yield fell 4 basis points to 4.61 percent. A basis point is 0.01 percentage point.

Profits for mining companies tumbled 24.7 percent in the quarter and earnings for wholesalers fell 12.6 percent. Profits at builders slipped 6.1 percent.

Bank Lending

A separate report published today by the central bank showed lending by banks and other finance companies to businesses dropped 0.3 percent in July, the sixth straight month of declines.

Oz Minerals on Aug. 27 said its net loss in the six months ended June 30 was A$585.6 million ($493 million), and Perth- based Iluka Resources Ltd., the world’s largest zircon producer, reported a first-half loss of A$55.8 million this month after writing down the value of two deposits in Australia and closing unprofitable mines.

Qantas, the nation’s biggest airline, said this month it will embark on a A$1.5 billion cost-cutting program after falling demand for travel triggered its first loss in six years.

Fairfax, Australia’s second-largest newspaper owner, had a net-loss of $14.7 million in the six months ended June compared with a profit of A$190.9 million a year earlier, the company said on Aug. 24.

Interest Rates

The drop in second-quarter profits gives Reserve Bank Governor Glenn Stevens more scope to leave borrowing costs unchanged in coming months to stoke domestic demand.

Stevens and his board will probably keep the benchmark interest rate at a 49-year low of 3 percent tomorrow for a fifth month, economists forecast.

GDP expanded 0.6 percent in the second quarter from the previous three months, when it rose 0.4 percent, according to the median forecast of 18 economists surveyed by Bloomberg News. The GDP figures will be published on Sept. 2.

While profits have fallen, other reports suggest the economy is rebounding

Business investment unexpectedly rose in the second quarter, confidence among executives jumped in July to the highest level in two years, home-loan approvals gained in June for a record ninth month, unemployment held at 5.8 percent as employers unexpectedly added 32,200 workers in July and sales of newly build dwellings increased in July.

Building Approvals

Building approvals probably gained 3.5 percent in July, a report tomorrow will show, according to the median forecast of economists surveyed by Bloomberg.

Governor Stevens said on Aug. 14 he will have to raise the benchmark interest rate from its “emergency” level as the economy recovers. The bank slashed the overnight cash rate target by a record 4.25 percentage points between September and April to stoke domestic demand.

“The troubles are probably behind us now and things are looking a lot better,” Gerry Harvey, chairman of Australia’s biggest electronics seller, Harvey Norman Holdings Ltd., said in an Aug. 28 interview.

“Consumer sentiment is much higher than it was six months ago and there’s no reason to believe that won’t continue as the year goes on,” Harvey said.

To stoke consumer spending, the government has distributed more than A$20 billion to households since the collapse of Lehman Brothers Holdings Inc. almost a year ago.

Woolworths Ltd., the nation’s biggest retailer, last week posted a 16 percent gain in profit for the six months ended June 28 as demand grew at its supermarkets and Big W discount stores.

Inventories held by companies fell 14.7 percent in the second quarter from a year earlier, today’s report showed.

Gross operating profit measures earnings before tax, interest, depreciation and amortization. It excludes asset sales and foreign-exchange gains or losses.

-- With assistance from Haslinda Amin in Singapore and Tracy Withers in Wellington. Editors: John McCluskey, Michael Heath

To contact the reporter for this story: Jacob Greber in Sydney at jgreber@bloomberg.net

Last Updated: August 30, 2009 22:50 EDT