Australia's massive services sector is growing again

Photo by Gareth Copley/Getty Images

Australia’s massive services sector — a linchpin for the economy — is growing again.

The latest Performance of Services Index (PSI) released by the Ai Group rose by 1.8 points to 51.5 in May, leaving it above the 50 level that indicates activity levels are expanding.

Like purchasing managers indices (PMIs) that are associated with manufacturing, the PSI measures changes in activity levels across Australia’s services sector from one month to the next. A reading of 50 indicates that activity levels are improving while a sub-50 figure indicates that activity levels are contracting — so the higher the number the better.

At 51.5, it says that activity levels are improving, albeit at a modest pace.

Mirroring the gain in the headline index, four of the five components that make up final reading rose during the month, indicating a broad-based improvement in activity levels across the sector.

The table below, supplied by the Ai Group, reveals the internal movements in the survey in May. To eliminate month-to-month volatility with the survey components, the group uses 3-month moving averages to provide a better indication of the underlying trend.

Of note, the new order subindex — a lead indicator for future levels of activity — jumped by 3.4 points to 55.3, indicating that the improvement in the headline index may accelerate further in the months ahead.

Sales also expanded after contracting in April, rising 2.0 points to 51.7, while the employment subindex — although still indicating that staff numbers are declining — ticked up to 49.1.

Adding some doubt over the strength in the main components, measures on capacity utlisation and wage growth slumped.

Although the main activity subindices recorded broad-based improvements, by subsector, the news was disappointing with only four of nine groups recording an expansion in activity levels for the month.

In a good sign for retail sales — something that has been disappointing so far in 2016 — retail trade recorded booming growth, rising 8.7 points to 61.5, a level not seen in at least the past five years.

There were also strong expansions recorded in the finance and insurance sector (58.8) along with health and community services (53.2).

Offsetting those gains, the Ai Group notes that business-orientated largely contracted.

“Communication services (down 1.2 points to 44.5), wholesale trade (down 1.2 points to 44.2) and transport & storage (down 5.6 points to 43.7) contracted further in May, while the household and tourism-oriented sectors of accommodation, cafes & restaurants (down 6.2 points to 42.3) and personal & recreation services (down 6.5 points to 39.1) experienced big drops,” they said.

The contraction in the tourism sector is certainly surprising, particularly given recent trade and international arrivals data which points to booming growth in the sector.

With more than half the sectors surveyed contracting, it indicates that the improvement in the headline PSI was driven by a narrow improvement in a handful of sectors, overshadowing weakness elsewhere.

That’s something that Innes Willox, CEO of the Ai Group, picked up on following the release of the May report.

“The return of the large services sector to expansion in May is good news for the sector and a sign of the resilience of the economy even as it continues to transition in the wake of falling mining-related investment and lower terms of trade. Sales were higher and importantly new orders grew again in May,” said Willox.

“While these are clear positive signs, expansion was notably concentrated in three of the nine services sub-sectors with retail, health & community services, and finance & insurance all in the black while property & businesses services was broadly steady. The remaining five sub-sectors contracted in May with particular slowdowns in personal & recreational services and accommodation, cafes & restaurants.

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