Australia just received another ugly reading on the health of its retail sector

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Australia’s services sector — the largest employer in the country and therefore the most important — continued to strengthen in December, albeit at a moderate pace.

However, that masked yet another ugly reading on the health of the nation’s retail sector.

The Australian Industry Group’s (Ai Group) Performance of Services Indicator (PSI) rose to 52.0 last month, up 0.3 points on the level reported in November.

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 52.0, activity levels improved at a slightly faster pace in December than one month earlier.

Source: Ai Group

Looking at the details of the report, the AI Group said firms’ servicing businesses once again outperformed those more aligned to consumers, continuing the trend seen throughout much of the year.

“Conditions continue to look better in the business-oriented sub-sectors than in the consumer-oriented sub-sectors,” it said.

“Hospitality accelerated into expansion (53.4) while property and business services expanded more rapidly to 65.5.

“Conditions stayed positive but slowed in wholesale trade (51.9) and personal and recreation services (51.8) [while] financial and insurance services slowed to a stable rate at 49.8 points.

“Contraction was evident in retail trade (44.5), health and community services (42.5), transport and storage (41.7) and communication services (41.1).”

Helping to explain the divergence between business and consumer-orientated sectors, the group said respondents in the latter reported “weak or hesitant customer spending due to cost of living pressures”.

While activity levels across the hospitality sector improved for the first time since 2015 — a sign that recent strength in labour market conditions may be prompting households to loosen the purse strings a little — activity levels for retailers continued to weaken, repeating the trend seen in the prior nine months.

“Respondents suggest consumers might be more willing to spend their discretionary summer budget on services and experiences,” the Ai Group said. “Retail businesses [reported a] lack of consumer confidence and a cautious attitude to discretionary spending due to cost of living pressures.”

So that suggests Australians were more willing to spend on experiences rather than goods in the latter parts of the year.

In comparison, business-oriented sectors reported “continuing demand from their construction and mining customers”.

By individual activity subindex, the Ai Group said new orders, employment and supplier deliveries all improved over the month. Elsewhere, stock levels were roughly stable and sales contracted.

Source: Ai Group

Despite the mixed internals of the report, the continued growth in new orders — a lead indicator on future activity levels — bodes well on the outlook for the sector in the early parts of 2018.

However, the weakness in sales will require close attention, especially with December’s reading well below the average seen in 2017.

“Australia’s services sector edged ahead in December as households closed out the year on a cautious note,” said Innes Willox, CEO of the Ai Group.

“Service businesses will be looking for a lift in consumer confidence and household spending as the New Year unfolds.”

The Ai Group will release Australia’s Performance of Construction Index early next week. Given recent trends, it’s likely to be a reasonably strong result meaning activity levels across Australia’s manufacturing, services and construction sectors all improved in the final month of 2017.

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