Australia | Nov 05 2008
By Chris Shaw
The weakening Australian economy is being reflected in a lack of confidence on the part of both consumers and businesses. Commonwealth Bank (CBA) notes this is pushing down activity in the country’s services sectors and keeping the Australian Industry Group-CBA Performance of Services Index at contractionary levels.
The index fell a further 2.8 points in October to a 42.1 reading, where 50.0 is the cut-off level between economic expansion and contraction. It was the seventh consecutive month of decline in the index and the figures show only one sector, communication services, rose out of the nine covered compared to two sectors recording gains the previous month.
The weakest sectors were the accommodation, cafe and restaurants and property and business services sectors, while retail trade activity also fell for the seventh consecutive month on the back of the ongoing decline in consumer confidence levels. Activity levels fell in all states, with the strongest rates of decline experienced in Queensland and Victoria.
As well, the new orders sub-index fell to a near-record low in the month, down 5.8 points to 38.7, and as CBA senior economist John Peters notes, this suggests further falls in activity levels in coming months. Sales of services levels paint a similar picture, as this index fell 2.2 points to 40, with only health and community services recording a stronger result compared to three sectors registering gains in September.
Employment in the services sector also fell slightly to be down 0.1 points to 46.9, while sales and supplier deliveries both also fell in October. On the plus side, capacity utilisation rose 0.3% to 75.8%.
According to Peters, the ongoing weakness in the services sector is a contributing reason to the Reserve Bank of Australia’s (RBA) decision to cut rates sharply in October and again yesterday, as the central bank remains concerned about collateral damage to the economy from the global slowdown.
In Peters’ view, the signs suggest rates have further to go on the downside, with the bank expecting a further 0.25% cut in February to bring the official cash rate down to 5.0%. However, this won’t be enough to prevent a period of sluggish economic growth and an increase in unemployment, in his view.
Australian Industry Group chief executive Heather Ridout pointed to the fall in new orders as a major worry for the sector, as it comes prior to the Christmas holiday season, when activity levels are usually higher. With services employment down for the fifth month in a row, she notes it is confirmation businesses are battening down for a potentially tough Christmas and they are doing so by reducing employment.
While the interest rate cuts will offer some relief, Ridout notes interest rates remain positive in real terms, meaning there is scope for further cuts in coming months.