Signs are emerging that Australia's sluggish economy may be starting to turn the corner

Dan Istitene/Getty Images
  • Activity levels across Australia’s services sector improved for the first time this year in May.
  • The improvement was helped by a lift in uncertainty following the recent federal election.
  • New work surged, pointing to improved activity levels in the period ahead. Staffing levels were also increased.
  • If sustained, and backed up by other economic data, the May update may signal the start of a turnaround in the Australian economy after a sluggish period over the past none months

Australia’s services sector, the largest employer in the country, saw activity levels rebound sharply following the federal election, helped by a surge in new work.

The Australian Industry Group’s (Ai Group) Performance of Services Index (PSI) jumped to 52.5 points in May after adjusting for seasonality, up a substantial six points on the level reported in April.

PMIs measure changes in activity from one month to the next, in this case for Australia’s services sector. A reading above 50 points to an improvement while a sub-50 figure indicates a decline. The further away from 50, the faster the improvement or deterioration is.

So at 52.5 in May, activity levels improved for the first time this year, and at the fastest pace since November 2018.

The improvement fits with a surge in Roy Morgan Research’s Australian business confidence index which recorded the largest monthly increase since September 2013 in May.

“A number of survey respondents indicated an expectation of improved trading conditions now that the uncertainties surrounding the federal election have been resolved,” said Innes Willox, CEO of the Ai Group.

With the exception of sales that fell at faster pace than April, indicating continued softness in demand, all of the survey’s remaining four activity subindexes improved during the month.

The gain in new orders was particularly impressive, jumping by 11.0 points to 55.6.

“This marks a return to growth following four months of contraction in new orders across the first part of 2019,” the Ai Group said in a statement.

“Several respondents attributed the rise in orders to a return to normal business trade following disruptions in April, solid mining sector demand, an extended product offering and election outcome certainty.”

With new work ramping up, the increase bodes well for the broader economic activity in the months ahead.

Fitting with the surge in new work, supplier deliveries also increased sharply. Cacity utilisation also improved to 80.9%, up 1.4 percentage points from April and above the average 79% level seen over the past 12 months.

The influx of new work also saw firms increasing staffing levels, an important development given the services sector is by far the largest employer in the country.

The result, particularly if sustained and replicated in official employment data, will be welcomed by the RBA given the bank cut interest rates in June in an attempt to lower unemployment levels.

Ai Group

While most activity subindex improved last month, substantially in some cases, the improvement was not uniform across the sector.

The Ai Group said only four of the eight sub-sectors saw activity levels improve in May.

“Among business-oriented sectors, wholesale trade reported robust results while consumer-oriented sectors were led by hospitality,” it said.

However, there was no sign of improvement for retailers with activity levels deteriorating sharply for a sixth consecutive month.

Retail sales fell unexpectedly in April, according to official data released by the ABS. The retail sector is also the second-largest individual employer in Australia behind the healthcare sector.

While the PSI is only a “soft” economic indicator, reflecting what firms are reporting rather than actual activity on the ground, the May update offers some tentative signs that Australia’s economy may be starting to turn the corner after a sluggish period since the middle of last year.

Further confirmation will be required in the months ahead, but this is a welcome start.

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