Activity levels across Australia’s services sector improved marginally in November, an encouraging sign given it is the largest employer in the country.
However, there’s been yet another unsettling reading on the health of the retail and hospitality sector, again raising concerns about the health of household finances.
The latest Performance of Services Indicator (PSI) from the Australian Industry Group (Ai Group) rose to 51.7 in seasonally adjusted terms, up 0.3 points on the level reported in October.
The PSI measures changes in activity levels across Australia’s services sector from one month to the next. Anything above 50 signals that 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.
That means that at 51.7, activity levels improved at a slightly stronger pace than October.
While a reasonable headline result, there was yet another concerning result for sectors aligned to discretionary spending from households with activity levels for retailers and hospitality firms deteriorating yet again, continuing the pattern seen throughout this year.
“The retail trade sub-sector’s index lifted to 46.3 points in November, indicating a further deterioration in conditions, albeit at a slower pace,” the Ai Group said.
“This marked a ninth month of flat or contracting activity, after mildly better conditions in early 2017.”
According to the group, firms said that competition from online and offshore sellers, along with rising costs for energy and housing and slow incomes growth, likely contributed to the result.
It was a similar story for activity levels for those firms operating in the hospitality industry, another sector highly exposed to discretionary spending levels from households.
“The accommodation, cafes and restaurants sub-sector’s index improved to 44.2 points in November,” the group said. “This marked 23 months of contractionary or flat conditions.”
Australian retail sales have either fallen or come in flat in the past three months, according to official data released by the ABS, coinciding with a spike in electricity, gas and petrol prices and soft wage growth over the same period.
Despite the weakness reported in those sectors, there were stronger results elsewhere, particularly for firms more aligned to demand from the business sector.
“Respondents in the business-oriented sub-sectors noted continuing demand from the construction and mining sectors, predominantly in the eastern states,” the report said.
Five of nine sub-sectors saw activity levels improve in trend terms during November, led by property and business services which saw its activity subindex lift to 59.0. Readings on personal and recreational services and wholesale trade also remained firmly entrenched in expansionary territory, coming in at 52.8 and 52.4 points respectively.
Like the headline PSI, any readings above 50 indicates that activity levels improved from a month earlier. The Ai Group uses trend readings for sub-sectors to help eliminate month-to-month volatility in activity levels.
Mirroring the modest improvement in the headline PSI last month, four of the survey’s five activity subindices also improved from the levels reported in October.
This table from the Ai Group shows how each component fared in trend terms.
Sales grew after falling in October while new orders — a lead indicator on future activity levels — rose to 52.9 points, up 1.4 points from a month earlier.
Fitting with the modest improvement recorded across the services sector, employment continued to grow, albeit at a slower pace.
The employment subindex fell 1.2 points to 52.1, hinting that strong employment growth so far this year may start to slow in the months ahead.
Commenting on the report, Innes Willox, Ai Group CEO, said there is now a clear divergence forming between consumer and business-orientated sectors.
“In general, the more business-facing sub-sectors such as property and business services, wholesale services and finance and insurance exhibited more strength than the more consumer-orientated sub-sectors such as health, hospitality and personal and recreational services.,” he said.
“A number of services businesses pointed to the squeeze on their margins from higher energy costs while others suggested that weaker consumer spending on services was in part due to the adverse impact of higher household energy bills.”