'Overwhelmingly negative': Australia receives another concerning report on the state of the economy

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  • Activity levels across Australia’s services sector went backwards for a third consecutive month in March. That’s the longest decline since early 2016.
  • The weakness was broad based with a deterioration seen across every sub-sector monitored. That’s something that’s not been seen since 2010.
  • Sales and inventories fell while margin pressures remained acute. New orders also fell for a third straight month, indicating that activity levels are unlikely to improve much in the June quarter.
  • Employment increased slightly after falling earlier in the year. Given the broader backdrop, there has to be some doubts as to whether hiring will continue.

Australia just received another ugly and concerning report card on the state of the economy, adding to concerns the slowdown seen in the second half of last year is becoming entrenched.

The services sector — the largest employer in the country — is going backwards in early 2019.

The Australian Industry Group’s (Ai Group) Performance of Services Index (PSI) stood at 44.8 in March after seasonal adjustments, logging the the first three-peat of sub-50 readings for the first time since early 2016.

This index measures changes in activity levels across Australia’s services sector from one month to the next. Anything above 50 signals activity levels are improving while a reading below 50 indicates they’re deteriorating. The distance away from 50 indicates how quickly activity levels are expanding or contracting.

So at 44.8 in March, activity levels have now deteriorated in each of the past three months, a very different backdrop to what was seen throughout much of 2017 and 2018 when conditions across the sector were far stronger.

As seen in the chart below, that’s a very different backdrop to what was seen throughout much of 2018. The March result adds to evidence that the slowdown in the broader economy likely extended into the March quarter this year.

“Comments from participants were overwhelmingly negative in March,” the Ai Group said.

“Services businesses reported weak customer demand in March, with several businesses noting slower sales and enquiries as well as weakening retail conditions.

“Some businesses that are directly or indirectly affected by the construction sector mentioned a negative impact on their activity arising from lower residential building commencements, a downturn in the housing market and credit tightening.

“In regional locations, excessive heat and drought conditions are affecting some services businesses while floods are impacting others.”

Underlining just how weak the March performance was, activity levels deteriorated across all services sub-sectors for the first time in close to a decade.

“The PSI indicated contraction across both the business-oriented sectors and consumer-oriented sectors in March,” the Ai Group said. “This was the first month in which every sector experienced contraction since August 2010.

The table below from the Ai Group is just plain ugly in terms of the message it is sending about the health of the services sector.

Ai Group

Sales, supplier deliveries and inventories of finished goods all declined sharply, especially for sales, indicating that demand is not only weak but not expected to improve.

Underlining that point, new orders — seen as a lead indicator on activity levels in the future — also fell for a third consecutive month.

Margin pressures also remained acute with input prices and wages continuing to grow while final selling prices went backwards.

Capacity utilisation across the sector also eased, pointing to the possibility of less investment and upward pressure on unemployment in the months ahead.

Like so many other data points in Australia right now, the only real area of strength was in employment which returned to growth after declining earlier in the year.

Despite the modest recovery, the increase was only small. Based on the broader performance across the sector in March, there also has to be some doubts as to whether the improvement will continue.

Attention will now turn to the release of the Ai Group’s Performance of Construction Index (PCI) on Friday, providing another report card on a large and significant parts of the Australian economy.

If the recent reports are anything to go by, it’s unlikely to deliver a welcome message.

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