Australia's services sector just expanded at the fastest pace on record

Phil Walter/Getty ImagesReflation still on track, according to futures traders.
  • Australia’s services sector expanded at the fastest pace on record in June, according to the Ai Group.
  • New orders surged, suggesting the strong momentum will continue in the months ahead.
  • Employment growth was also incredibly strong, a good sign for hiring given it’s the largest employer in Australia.

Australia’s services sector is the largest employer in the country, and therefore the most important, especially at a time when the Reserve Bank of Australia (RBA) is banking on stronger labour market conditions to lift wage and inflationary pressures.

It just expanded at the fastest pace on record, something that looks set to continue as new orders flood in.

The Australian Industry Group’s (Ai Group) Performance of Services Indicator (PSI) jumped to 63.0 points in June after seasonal adjustments, leaving it at the highest level on record.

The PSI measures perceived 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 63.0, activity levels not only improved in June, they did so at a fastest pace ever seen before.

Bullish.

Activity levels have now improved in each of the past 16 months, the longest stretch of continuous expansion since before the global financial crisis.

Suggesting the strong momentum is likely to continue in the months ahead, the new orders subindex — a lead indicator on future activity levels — rose 0.7 points to 65.7, indicating that orders are coming in thick and fast.

“This marked sixteen months of continuous growth for this leading indicator and at a slightly faster rate,” the Ai Group said.

Like the PSI, a reading above 50 indicates an improvement from a month earlier.

The remaining four activity subindexes also registered an improvement compared to May with sales, inventories and supplier deliveries surging during the month.

Importantly, the employment subindex — a measure on whether firms are adding or shedding staff — jumped 4.7 points to 63.9.

Ai Group

“This subindex has remained buoyant in 2018, averaging 58.1 points since the start of the year,” the Ai Group said.

“Employment demand remains uneven across the services sectors, with business-oriented sub-sectors indicating stronger demand for labour than consumer-oriented businesses such as retail and hospitality.”

Despite that split, it will not be lost on the RBA who suggested that the “outlook for the labour market remains positive” at its July monetary policy meeting.

“The vacancy rate is high and other forward-looking indicators continue to point to solid growth in employment,” the RBA noted.

If the PSI employment measure mirrors that in actual hiring levels in the months ahead, it suggests Australian unemployment will fall further, as the RBA expects.

Like the RBA, the Ai Group noted that a “number of businesses are reporting difficulties sourcing skilled employees”.

Despite a small decline in June, capacity utilisation across the sector remained at elevated at 81.3%, a result, accompanied by the surge in employment, that suggests firms may have to invest in order to deal with strengthening demand.

“Capacity utilisation has been well above its long-term average of 75.8% in 2018, suggesting an increasing number of businesses have low spare capacity and will soon need investment to expand,” the Ai Group said.

At its July meeting, the RBA described non-mining business investment as “continuing to increase”. The results from this survey suggest this is likely taking place.

Like the divergence in hiring levels in business and consumer-orientated firms, the Ai Group said those same trends were evident in activity levels across individual sectors.

“The predominantly business-oriented sub-sectors such as property, finance and transport reported solid demand from customers in construction and manufacturing, while the health sector also reported positive results,” the group said.

“The more discretionary, mainly consumer-oriented sub-sectors continued to remain relatively weak in June.

“Retail trade contracted again, while hospitality was stable.”

The group said businesses whose customers are predominantly households continued to report cautious discretionary spending due to rising costs and tighter disposable incomes.

Those trends have now been evident for much of the past year, mirroring the divergence in business and consumer confidence over this period.

In what was an otherwise incredibly strong report, that remains the one weak spot, a major concern given household consumption equates for just under 60% of Australian economic growth.

However, if hiring levels pick up as the survey suggests they will, that will help to alleviate those concerns.

The outlook for the Australian economy, at least based on this report, appears to be brightening.

The Ai Group will release its Performance of Construction Index — a measure on activity levels across Australia’s construction sector — on Friday.

Like the services sector, it too is a crucial cog within the Australian economy.

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