Australian services firms just reported that new orders and sales tanked, but they don't think the slowdown will last

Vince Caligiuri/Getty Images
  • Activity across Australia’s services sector grew at the weakest pace since February 2017 in October.
  • Sales and new orders slumped, painting a worrying picture on both current and future demand.
  • Hiring levels surged, indicating that firms don’t believe the slowdown will last.
  • The weakness is concentrated in businesses catering to other businesses (B2B).

Australia’s largest business sector — services — grew at the slowest pace since early 2017 in October , casting renewed doubt as to whether strong economic growth seen in the first half of the year will continue in the months ahead.

The Australian Industry Group’s (Ai Group) Performance of Services Index (PSI) fell to 51.1 last month in seasonally adjusted terms, down 1.4 points on the September level.

It was the lowest reading since February 2017.

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 51.1, activity levels still improved last month, albeit marginally.

As seen in the chart below, momentum across the sector has slowed sharply in recent months, sitting well below the series high of 63.0 struck in June this year.

The moderation in activity levels seen last month was driven by steep falls in new orders and sales, panting a worrying picture on both current and expected demand in the months ahead.

“The sales index fell by 7.0 points to 45.8 points in October, marking the first month of contraction this year,” the Ai Group said.

“Respondents in the consumer-oriented services sectors generally reported good sales over the month while those in the business-oriented services sectors reported weaker sales.”

The divergence between consumer and business demand is in stark contrast to what was seen throughout much of 2017 and in early 2018 when the latter was strong, helping to mask weakness in consumer-orientated sectors.

Similar trends were also evident in new orders last month, deemed to be a lead indicator on activity levels in the future.

“The new orders index fell by 6.0 points to 47.4 in October– the first contraction after 25 months of stable or expansionary conditions,” the Ai Group said.

“New orders also marked the divergence between business-oriented and consumer-oriented services sectors in October.

“Businesses that mostly serve consumers and households reported a positive lift in new orders, but those in business to business sectors said they were generally flat or contracting.”

Mirroring those readings, activity levels by individual sub-sector also revealed that stronger conditions in businesses catering for consumers helped to offset weaker results for those reliant upon business demand.

Ai Group

Despite the mixed results, services firms indicated that they increased worker headcounts at a rapid pace last month, hinting that employment growth will remain firm in the months ahead and businesses believe the recent weakening in demand will be temporary in nature.

“With the employment index pointing to further job creation in the month, it appears that service businesses are viewing October’s easing in sales and new orders and the reported drop in selling prices as a temporary wind-back from the solid growth of previous months,” said Innes Willox, Ai Group Chief Executive.

“This suggests businesses remain hopeful of continued growth over the closing months of the year.”

Whether that eventuates remains the unanswered question.

Weak demand and strong hiring is unlikely to last for long should current trends be maintained, particularly should margin pressures continue to weigh on profitability levels across the sector.

In October, the Ai Group said that end-prices to customers fell quite sharply while input prices continued to increase rapidly, indicating an intensification of margin pressures.

It was this, along with an inability to attract suitably-skilled staff, tighter financing conditions and trade tensions, that dominated concerns among services firms in the latest survey, Willox said.

“Input costs remain elevated for services businesses,” he said.

“Tightening access to finance was mentioned by some respondents as inhibiting their activity in October. Local skills shortages remain a top concern for some businesses, while international trade policy changes are affecting others, particularly in those in the wholesale trade sector.”

While some details in the October report were pleasing, especially the employment index and resurgence in consumer demand, more broadly, the business-led slowdown seen in recent months is concerning, especially with the next federal election unlikely to be held until the middle of next year, creating a scenario where political uncertainty may impact business decisions for quarters rather than months.

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