Air conditioning gave Aussie businesses a surprise boost in the January heatwave

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Australia’s services sector enjoyed a strong start to 2018, adding to the positive signals coming from smaller sectors in the Australian economy.

The Australian Industry Group’s (Ai Group) Performance of Services Indicator (PSI) rose to 54.9 last month in seasonally adjusted terms, up 2.9 points on the level reported in December.

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 54.9, activity levels not only improved last month, they did so at a faster pace than December.

Source: Ai Group

“Respondents noted improved business confidence and orders from business customers in January, boosted by a rebound in real estate transactions in some locations,” the Ai Group said, adding that “excessive heat was a plus for some businesses, as more customers sought out air-conditioned shops, restaurants and recreation services”.

Helping to offset those positives, it said “businesses across all sub-sectors continue to report problems absorbing higher input costs including higher energy costs and annual increases in regulatory costs,” adding that “these cost rises are eating into margins and increasing pressure to raise selling prices”.

So while overall activity levels improved across the sector, it was not without its challenges.

This table from the Ai Group shows how each activity subindex fared in January compared to a month earlier. Like the headline PSI, a figure above 50 indicates that a component strengthened from a month earlier in trend terms.

Source: Ai Group

Impressively, despite the threat posed by higher costs eating into margins, all five activity subindexes improved from a month earlier, albeit at varying speeds.

“All five of the activity sub-indexes expanded in January 2018,” the group said.

“The employment sub-index was especially strong in January. It lifted by 5.4 points to 58.1 points, its highest monthly result since December 2004. Employment was stronger across all services sub-sectors except wholesale trade.

“Capacity utilisation is also relatively elevated at 81.1% of available capacity, just shy of its peak of 81.4% in August 2017.”

As the largest employing sector in the country, the strength in the employment index bodes well on the outlook for hiring, hinting that the strength seen in 2017 will continue in the early parts of 2018.

And, as the Ai Group points out, it appears to be leading to skill shortages in some areas, an outcome that usually leads to wage growth as labour market conditions continue to tighten.

“Stronger labour demand is evident in the increase in reports of skill shortages in specialised fields,” it said.

The elevated level of capacity utilisation is also an encouraging sign that non-mining business investment may also strengthen further, confirming similar signals seen in recent official and private-sector surveys.

As a lead indicator on future activity levels, the new orders subindex — at 54.5 — is also a good sign for the period ahead.

While a strong January report card, the Ai Group said a distinct divergence still remains between sectors reliant on households in comparison to those more aligned to demand from the business sector.

“The PSI continues to show considerable variation in activity across subsectors in January, as it did through 2017,” it says.

“Conditions are generally looking better in the business-oriented sub-sectors than in consumer-oriented sub-sectors.

“Three of the nine sub-sectors expanded in January (transport, finance, property & business), two were approximately stable (hospitality and personal services) and four contracted (wholesale, retail, communications and health, education & community services).”

The weakness in retail, health and education — among Australia’s largest sectors both in terms of economic importance and employment — will need to be monitored closely, especially should it persist in the months ahead.

With the Ai Group’s reports on manufacturing and services both impressing in January, market attention will now turn to the release of the group’s Performance of Construction Index (PCI) on Wednesday, especially following December’s sharp pullback in non-housing building approvals.