- Activity levels improve across Australia for 12 consecutive months
- Margin pressures intensify for services firms, especially in energy costs
- Retail sector records its fastest deterioration in activity levels since mid-2012
Australia’s services sector — the largest employer in the country and therefore the most important — saw activity levels improve at a decent pace in February, continuing the trend seen over the past 12 months.
However, while the broader sector is performing well, the same can’t be said for retailers.
The Australian Industry Group’s (Ai Group) Performance of Services Indicator (PSI) fell to 54.0 last month in seasonally adjusted terms, down 0.9 points on the level reported in January.
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 54.0, activity levels still improved in February, just at a slightly slower pace than one month earlier.
Activity levels have now improved in each of the past 12 months, the longest stretch of continued expansion since before the global financial crisis.
Like the headline PSI, most of the internals of the report were good, with the exception of the retail sector which recorded another ugly deterioration in activity levels.
The Ai Group said all five activity sub-indexes expanded over the month, led by strong performance from new orders and sales.
“The new orders sub-index increased by 0.3 points to 54.8 points. This was the 18th month of positive or stable results and augurs well for further growth in 2018,” the group said.
“The sales sub-index increased by 0.8 points to 54.7, returning to levels seen in mid-2017 after several lacklustre months at the end of last year.”
Inventory levels also grew at a faster pace while readings on employment deliveries softened from a month earlier.
“While employment continued to grow in February, it fell back 4.2 points to 53.9 after very strong growth in January,” the group said.
“Employment demand was mixed across the sector and expanded in industries with higher level skill needs, while employment need was weaker across retail, wholesale and hospitality.”
This table from the Ai Group shows the performance of individual sub-indexes in February compared to January and the average over the past 12 months.
Like the headline PSI, a figure above 50 indicates that activity levels improved from a month earlier. The results are presented in trend terms to reduce volatility seen from one month to the next.
Across the individual sub-sectors, the Ai Group said activity levels improved in most industries surveyed.
“Six of the nine sub-sectors expanded — wholesale, transport, finance, property & business, health, and personal and recreational services — while two — hospitality and communication — were approximately stable,” it said.
The one exception to the rule came from the retail sub-sector which recorded another ugly performance.
“The retail trade sub-sector deteriorated in February, dropping 2.7 points to 35.8,” the group said.
“This is the eleventh consecutive month it has contracted and the lowest the subsector has recorded since June 2012.
The Ai Group says it “remains an anomaly in the improving economy”, adding that “weak consumption growth from highly indebted households has meant that businesses are unable to increase prices, while intense competition, particularly from assertive market disruptors using online platforms, will continue to put pressure on the sector.”
Given the retail sector is the second-largest employer in Australia behind healthcare, this reading is unsettling when it comes to the outlook for employment growth and household spending in early 2018.
Along with the performance of the retail sector, the Ai Group said broader margin pressures remain another area of concern.
“Respondents continue to note that increasing costs to business, including higher energy charges, are putting increased pressure on margins,” it said, noting that the input prices sub-index jumped by 8.8 points to 69.5, leaving it at the highest level since April 2015.
In contrast, the sub-index for selling prices rose by a smaller 1.1 points to 52.9 points.
“It suggests businesses are no longer able to absorb input cost increases as they stated they were doing in the past and are now passing them on, at least in part, to customers,” the group says.
While that suggests inflationary pressures are building, it points to margin pressures across the sector. It also presents a headwind to household consumption given ongoing weakness in wage pressures.
Despite the threat posed by higher prices, lower margins and weak wage growth, Innes Willox, Ai Group CEO, says ongoing strength in new orders is a welcome offsetting factor, at least in the near-term.
“While input costs are rising and competitive pressures are inhibiting the ability of service companies to pass on costs to customers, further growth in new orders points to expansion of the overall services sector continuing in the months ahead,” he says.
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