Australia's services sector is firing on all cylinders -- and that's great news for the economy

Peter Macdiarmid/Getty ImagesIt’s big and important, so if it gets going, the broader economy will likely follow suit.
  • Australia’s services sector, the largest employer in the country, is growing strongly at present, helped by stronger sales and surging new orders.
  • Firms are reporting skill shortages and strong levels of capacity utilisation, something that bodes well for hiring, wage growth and non-mining business investment.
  • Much of the strength is concentrated in sectors that cater for other businesses, rather than households. Sectors that rely upon discretionary spending from households remain weak.

Australia’s services sector, the largest employer in the country, is humming at present, benefiting from strong sales and a surge in new orders.

The Australian Industry Group’s (Ai Group) Performance of Services Indicator (PSI) jumped rose to 59.0 in May in seasonally adjusted terms, up 3.8 points from April.

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 59.0, activity levels not only improved in April, they did so at a faster pace.

Activity levels have now improved in each of the past 15 months, the longest stretch of continuous expansion since before the global financial crisis.

Ai Group

Mirroring the performance of the headline index, most of the surveys activity subindexes recorded strong improvements in May, headlined by a surge in new orders.

“New orders grew faster in May than in April, up 8.7 points to 65.0 points, while sales also continued its robust run, lifting 4.3 points to 60.1 points,” the Ai Group said.

As a lead indicator on activity levels in the future, the strength in new orders is particularly pleasing, signalling that the strong performance seen in recent months will likely continue in the second half of the year.

The Ai Group said capacity utilisation across the sector stood at 81.9%, just off the record high set in April.

“Capacity utilisation has been well above its long-term average of 75.7% in 2018, suggesting more businesses have low spare capacity and may soon need investment to expand,” the Ai Group said.

This bodes well for non-mining business investment, something that the RBA is banking on to help lift economic growth over the next few years.

With new orders and sales growing strongly, and capacity utilisation remaining near record highs, there was also good news on hiring and wage growth.

Both increased at a faster pace than April.

“Employment accelerated slightly, with this sub-index up marginally in May and marking a year of expanding employment,” the Ai Group said.

“Wages also rose, up 4.4 points to 64.6, with pressures increasing as skills shortages emerge in higher-skilled occupations and in business-oriented sub-sectors.”

Ai Group

The Ai Group said demand for workers was strongest in those firms catering for other businesses, rather than households.

“Employment demand remains uneven across the services sectors with business-oriented sub-sectors such as property services, finance and transport indicating stronger demand for labour than the more consumer-oriented businesses such as retail, hospitality and personal services,” it said.

Those trends reflected differing demand levels between business and consumer-related sectors at present, it said.

“The more discretionary, mainly consumer-oriented sub-sectors, remained relatively weaker in May,” the group said.

“Retail trade contracted again, as did hospitality.

“Businesses in these sub-sectors continue to report cautious discretionary spending due to rising energy and other household costs, as well as changing consumer preferences.”

In trend terms, the Ai Group said that six of nine sub-sectors monitored saw activity levels improve in May, led once again by those sectors that generally cater for business demand.

“The predominantly business-oriented sub-sectors such as property, finance and transport reported solid demand from customers in construction and manufacturing,” it said.

Despite the persistent divergence in demand from businesses and households, few can argue that the overall theme from the May report is one of strength.

As a major cog in the broader Australian economy, this report bodes well for economic activity in the months ahead.

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