There are signs Australia's biggest industry sector is slowing down

Prakash Singh/AFP/Getty Images
  • Activity levels across Australia’s services sector improved at the slowest pace so far in 2018 last month.
  • Growth in sales and new orders continued to slow, while employment growth nearly stalled.
  • Growth across the sector is lumpy and the result is masked by ongoing strength in healthcare.

Activity levels across Australia’s services sector — the largest employer in the country — continued to slow in August, driven by weaker growth in sales, new orders and employment.

The Australian Industry Group’s (Ai Group) Performance of Services Indicator (PSI) fell to 52.2 last month in seasonally adjusted terms, down 1.4 points on the level reported in July.

It was the lowest level seen since December 2017, and well off the series record-high of 63.0 struck in June this year.

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 52.2, activity levels still improved last month, but at a slower pace than July.

Activity levels have now improved in each of the past 18 months, the longest stretch of continuous expansion since before the global financial crisis.

However, as seen in the chart below, momentum across the sector has slowed to a crawl in recent months.

Like the headline PSI, most of the survey’s activity subindexes weakened compared to July, including new orders, a lead indicator on activity levels in months ahead.

Sales and inventory levels also grew at a slower pace while capacity utilisation slipped by 1.7 percentage points to 78.5%.

Mirroring the broader slowdown in activity, the survey’s employment subindex fell 2.8 points to 50.6, indicating that hiring across the sector slowed to a crawl last month.

“Employment grew strongly in the first half of 2018 peaking at a series high in June but the moderation in July and August has reversed the gains and it has virtually returned to the long-term mean for this indicator,” the Ai Group said.

Like many other leading labour market indicators in recent months, the result suggests the slowdown in employment growth seen this year will likely continue in the months ahead. The services sector, after all, is the largest employer in Australia by some margin.

There was also unwelcome news on profitability levels with input costs rising substantially faster than selling prices, indicating an escalation in margin pressures.

“Respondents said increasing input costs are continuing to put pressure on margins because many businesses are unable to increase their selling prices, despite the rising price of their inputs,” the Ai Group said.

“Most businesses have been unable to implement price rises in order to cover their increasing input costs.”

Ai Group

Looking at the performance across the sector in more granular detail, activity levels improved in five of the eight sub-sectors monitored, including at retailers whose index lifted three points to 57.0, the highest level since June 2016.

That may reflect previous strength in the June quarter, something that did not continue into July, according to figures released by the ABS earlier this week.

“Some retailers noted that construction and related activity had a positive effect on their sales in the month, however other retailers noted a continuing lack of customer demand or more subdued spending in drought affected areas,” the Ai Group said.

Despite the improvement at retailers, activity levels at accommodation providers, cafes and restaurants — another sector influenced by discretionary spending patterns — fell for a 16th consecutive month.

Along with retailers, the modest improvement in the headline PSI was largely due to the healthcare sector with its activity index lifting 0.3 points to 63.0, the seventh month in a row that it increased from a month earlier.

It stood at the highest level since February 2014.

Activity at property and business services providers also improved rapidly, fuelled by strong demand from business-orientated sectors, rather than the residential sector.

In contrast, the transport and storage services firms index dropped tumbled to 44.6 points, indicating a deterioration in activity levels during the month.

“Businesses in this sub-sector reported slower demand from business customers and assertive discounting from their competitors for the remaining work,” the Ai Group said.

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