Australia | Apr 05 2011
– Australian services sector conditions remain tough
– AIG-CBA PSI fell 2.2 points in March
– Reading shows consumers remain cautious on outlook
By Chris Shaw
Times remain tough for the Australian services sector, the March reading of the Australian Industry Group – Commonwealth Bank Australian Performance of Services Index (Australian PSI) showing a decline of 2.2 points to 46.5. Any reading below 50 indicates a contraction in activity levels.
The decline in the PSI in March was due to solid declines in activity in the retail trade and transport and storage sub-sectors. Overall, CBA senior economist John Peters notes, only three of the nine service sub-sectors recorded a gain in March, down from four in February. These three were the personal and recreational services, the finance and insurance and the communications services sub-sectors.
Relative sector performance has changed, Peters pointing out the general decline in the PSI in recent months had largely been due to weaker activity in the communication services and finance and insurance sub-sectors.
But since the start of the year performance in these sub-sectors has improved, only to be offset by weaker results in the transport and storage and hospitality sub-sectors.
While the Australian PSI has fallen gradually over the past 12 months, both the input prices and average selling prices indices have moved higher. Both now stand at their highest levels for almost 12 months. According to Peters, the increases may reflect the impact of natural disasters on fruit and vegetable crops and higher petrol prices.
The sales component of the PSI also declined in March, falling 6.2 points to a reading of 47.7. The fall comes after a strong gain in February and was fairly broad based across most sub-sectors. Capacity utilisation in the services sector rose to 76.4% in March and is around the average level recorded since the beginning of 2010.
New orders declined 0.2 points in March to a reading of 47.2, with declines particularly sharp in the wholesale trade and health and community services sub-sectors. Employment in the services sector similarly declined in March by 0.4 points to 47.4, falls being registered in seven of the nine sub-sectors.
The average wages sub-index also fell slightly but Peters notes in trend terms wage growth has been relatively stable over the past 12 months. While the stock component of the Australian PSI actually rose in March, the measure remains below the 50 point level separating expansion from contraction.
Deliveries to the services sector fell 4.8 points to a reading of 41.5, which Peters notes is broadly in line with levels seen immediately following the Global Financial Crisis (GFC).
According to Peters, the PSI data for March is signaling while the minerals sector of the Australian economy remains very strong, consumers and businesses across Australia continue to adopt a more cautious approach.
The fall in new orders suggests service providers are not confident in the immediate economic outlook, in part reflecting vulnerability to higher interest rates or any Federal Budget measures that would further slow any recovery in private sector demand.
Peters takes the view the PSI data are consistent with monthly trade data from the Australian Bureau of Statistics and Reserve Bank of Australia private sector credit numbers. He suggests a key factor behind ongoing weakness in consumer spending is continued anxiety in the wake of the GFC. This is apparent in high household savings rates and de-leveraging by consumers.
Retail sales are also suffering from the strength of the Australian dollar. As Peters points out, this is seeing more and more consumers move towards online shopping.
