Services sector lifts after months of decline: Report

The services sector has lifted after three months of decline, according to the Australian Performance of Services Index, which was 2.9 points stronger at 51.9 points in January.


The PSI is compiled by Australian Industry Group and the Commonwealth Bank. A reading above 50 indicates services activity is expanding, while below 50 indicates it is declining.


According to the report, the latest result can be attributed to strong growth in accommodation, cafés and restaurants (56.4 points), and finance and insurance (67.5 points).


The personal and recreational services sub-sector also recorded strong growth (66.6 points).


However, the remaining sub-sectors contracted. In six of the nine sub-sectors, most businesses reported deeper discounting of selling prices compared to a year ago.


Wholesale trade (37.7 points), property and business services (44.4 points) and communication services (30 points) recorded significant declines in January.


Peter Burn, AIG group director of public policy, says the overall lift in services sector activity is a welcome change from the contraction in the sector in the last quarter of 2011.


“The return of key sectors, directly exposed to household spending, to positive territory provides a tentative sign that the easing of interest rates towards the end of 2011 may have lifted consumer confidence despite the dampening stream of news coming from Europe,” Burn says.


“Overall, however, the services sector remains patchy and continues to face strong headwinds including from the strength of the dollar and flat labour market conditions.”


According to CBA senior economist John Peters, it is “heartening” to see the PSI return to expansionary territory, following soft readings in the fourth quarter of 2011.


“The RBA’s official rate cuts totaling 0.5% in November and December have probably had some positive spinoff for segments of the services struggling against the substantial negative headwinds of the robust Australian dollar, diffident and frugal consumers, and weak business confidence,” Peter says.


“With continuing large question marks swirling around global markets relating to the European sovereign debt crisis, we expect the RBA to cut rates again by 0.25% soon, probably as early as next week’s February RBA board meeting, to help further ‘fireproof’ the local economy from any potential negative fallout from Euroland’s chronic fiscal and debt woes.”


“This should in turn give all sectors of the economy, including services, some further joy.”


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