Australia just received a worrying signal on how much households are spending

Photo: Cassie Trotter/ Getty Images.
  • Activity levels across Australia’s huge services sector continued to improve last month.
  • Business-orientated sectors outperformed those more aligned to households, continuing the divergence seen in recent years.
  • Activity levels for retailers and hospitality firms continue to deteriorate, casting a worrying picture on household spending levels, especially in discretionary areas.

Activity levels across Australia’s services sector, the largest employer in the country, continued to improve in April, led by firms more aligned to business demand.

However, the same cannot be said for those more aligned to demand from the household sector with activity levels deteriorating sharply.

The Australian Industry Group’s (Ai Group) Performance of Services Indicator (PSI) fell to 55.2 last month in seasonally adjusted terms, down 1.7 points on the level reported in March.

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 55.2, activity levels still improved in April, just at a slightly slower pace than March.

Activity levels have now improved in each of the past 13 months, the longest stretch of continuous expansion since before the global financial crisis.

Source: Ai Group

However, while overall activity levels across the sector continue to improve, the Ai group said there was a stark divergence in the performance between those industries aligned to the business and household sectors.

“The more business-oriented sub-sectors reported increasing demand from their customers in construction and manufacturing,” it said.

However, in contrast, those aligned to discretionary household spending remained weak.

“Retail trade contracted again in April, as did hospitality in trend terms,” it said.

“Businesses in these sub-sectors continue to report restrained discretionary spending from households due to rising energy and other household costs and changing consumption patterns.”

The subindex measuring activity levels for retailers came in at 42.3 points in trend terms, the 13th month in a row that activity levels weakened.

“Some retailers reported unseasonably warm weather and the holiday period as having a dampening effect on sales in April,” the Ai Group said.

The gauge measuring activity levels for hospitality firms, again, aligned to discretionary spending by households, was even weaker than the retail sector, falling 2.8 points to 41.4.

“Some respondents noted that Easter holidays and special events in April such as the Commonwealth Games did not have the positive effect they had been expecting,” the Ai Group said.

The weakness in these two areas — among the largest employers in the country — paints a dire picture on household discretionary spending, and suggests that risks to upcoming retail sales and household consumption reports are to the downside.

It also coincides with recent price declines in Sydney and Melbourne properties.

However, while activity levels in those key areas were weak, they were the exception to the rule in April with all other seven sub-sectors reporting an improvement from one month earlier.

Mirroring that performance, all bar one of the survey’s five activity subindices improved in April.

Source: Ai Group

Hiring levels grew at a faster pace, led primarily by business-orientated sectors.

“Employment demand is uneven across the services sectors, with business-driven sectors now indicating a stronger demand for labour than the consumer-oriented sectors such as hospitality, retail and health and community services,” it said.

Elsewhere, new orders grew at a slower-yet-still-strong level, indicating that activity levels will likely remain firm in the months ahead.

Sales also grew at a slightly faster pace while growth in inventory levels slowed.

The only component to register a decline was supplier deliveries which fell 12.6 points to 48.7.

“This came after an historical high in March, suggesting that businesses had brought forward deliveries to arrive before the Easter holiday period,” the Ai Group said.

Hinting that activity levels may struggle to improve at a faster pace in the period ahead in the absence of new investment, total capacity utilisation across the sector rose to a record-high level of 82.4%.

“Capacity utilisation ihas been well above its long-term average of 75.7%, indicating that more businesses are operating efficiently and/or more businesses may need to invest in order to grow further from here,” the Ai Group said.

While an overall solid report card, the softness in retail and hospitality remains a concern, especially if that weakness is captured in hard data in the months ahead.

One definitely worth keeping an eye on given the importance of household spending to the Australian economy.

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