- Activity levels across Australia’s services sector slowed sharply in December.
- Firms said they shed staff for the first time since September 2016. The services sector employs around 70% of all Australian workers.
- New orders rose strongly, hinting the slowdown in activity, and shedding of staff, may not last for long.
- Australia’s manufacturing sector contracted for the first time in over two years in December. A similar outcome is expected for the construction sector over the same period given recent evidence.
Activity levels across Australia’s services sector slowed sharply in December, adding to concerns about the economic outlook following a noticeable weakening in recent data.
Worryingly, firms indicated they shed staff at the fastest pace in over two years.
The Australian Industry Group’s (Ai Group) Performance of Services Index (PSI) slumped 3 points to 52.1 last month in seasonally adjusted terms, moving the index back towards the multi-year low of 51.1 struck in October.
The PSI 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 suggests they’re deteriorating.
The distance away from 50 indicates how quickly activity levels are expanding or contracting.
So at 52.1, while activity levels improved last month, they did so at a slower pace than November. While activity levels have now improved in each of the past 22 months, the pace of the improvement slowed noticeably in the second half of 2018, mirroring a similar outcome in Australia’s Q3 GDP report.
While the decline in headline PSI was disappointing, the move in the employment subindex was just plain ugly.
It fell to 45.5, a decrease of 7.4 points on the level reported in November, leaving it at the lowest level since September 2016.
Like the PSI, a reading below 50 in any of the activity subindexes indicates a decline from a month earlier. The level reported in December is a concern given the services sector is the largest employer in Australia, accounting for around 70% of all workers.
“The employment index had been stable or growing over the past twenty-six months reaching a recent peak in June 2018, but like other indicators it has been trending down since the middle of the year,” the Ai Group said.
Adding to concerns, the group noted that “employment fell or was flat across seven of the nine sectors”. That means the weakness was broad-based in nature last month. While one month does not make a trend, a similar result in January will only intensify concerns.
Like the employment subindex, three of the remaining four activity measures also weakened from a month earlier with sales, deliveries and finished inventories all growing at a slower pace than November.
Importantly, the new orders subindex — regarded as a lead indicator on activity levels in the months ahead — was the only area to show faster growth than a month earlier.
However, capacity utilisation — also regarded as lead indicator on investment and employment — continued to soften, leaving it well below the average seen over the prior 12 months.
The news was also not great for margin pressures across the sector with input and labour costs increasingly significantly faster than selling prices during December.
As has been the case for some time, the Ai Group said there was a noticeable divergence in activity levels between consumer and business-orientated services firms with the former, somewhat surprisingly, continuing to outperform the latter.
“While still growing, the services sector slowed at the end of 2018 as contractions in business-orientated sub-sectors weighed against the more buoyant consumer-facing sub-sectors,” said Ai Group Chief Executive Innes Willox.
More broadly, the Ai Group said “businesses reported a softening in demand and customers deferring purchases into the new year”. It also noted that “international trade uncertainties and falling commodity prices impacted the wholesale trade sector”.
Helping to keep sales in positive territory, some firms indicated that they used price discounting as method to increase turnover.