Australia's all-important services sector expanded at the fastest pace in nearly a decade

Photo: Guang Niu/ Getty Images.

It’s looking increasingly likely that Australia’s shock economic contraction in the September quarter was an aberration rather than the start of a longer-lasting trend.

Following a strong rebound in activity levels across Australia’s manufacturing sector in December, the far larger, and economically more important services sector, has also followed suit.

Not only that, activity levels expanded at the fastest pace seen in nearly a decade.

Yes, the largest sector in the Australia economy, and the largest employer in the country, was booming at the end of 2016.

The latest Performance of Services Indicator (PSI) released by the Ai Group jumped by a whopping 6.6 points to 57.7, leaving it at the highest level seen since May 2007.

The PSI measures changes in activity levels across Australia’s services sector from one month to the next, with any reading above 50 indicating that activity levels improved from a month earlier.

At 57.7, not only did they improve, they improved rapidly.

That’s very good news, particularly for the outlook for economic growth and employment.

“The jump in the Australian PSI in December to its highest level in nearly a decade comes after a gradual recovery in October and November”, said Innes Willox, chief executive at the Ai Group.

“The services sectors provide the bulk of Australia’s economic activity and employment opportunities, so it is crucial to us all that they perform well.”

Like the headline PSI figure, the internals of the report were also strong, particularly for new orders, a lead indicator that suggests the improvement seen in December may continue in the early parts of 2017.

Source: Ai Group

At 60.4, the new orders subindex jumped by 6.4 points from a month earlier, leaving it at the highest level seen since March 2008. Put another way, that indicates that new orders grew at the fastest pace seen since before the global financial crisis.

The survey’s sales measure also surged, jumping a whopping 14 points to 62.1, recovering strongly from a modest contraction registered in November. Given these measures use three-month moving averages, it suggests the recovery seen in December was nothing short of spectacular.

There was also good news on the hiring front with the employment subindex rising by 4.3 points to 56.6, suggesting hiring levels accelerated sharply across the sector. Wages also continued to grow, although the pace was slower than that seen in November.

That’s an important outcome given Australian employment growth slowed sharply in the second half of 2016, helping to place downward pressure on wages.

The measures on inventories and supplier deliveries also expanded, albeit at a modest pace.

That meant that all of the survey’s activity subindices expanded during the month, suggesting that the recovery was broad in nature.

Fitting with that view, the Ai Group said that six of the nine services sub-sectors tracked in the survey saw activity levels improve in December, a far greater number than those recorded earlier in the year.

The improvement was led by personal and recreational services with the sectors subindex lifting 5.2 points to 63.0, the highest level since March 2012.

Reflective of the strong December report, respondents said that conditions were more positive in December with customer demand strengthening due to increased orders from the mining sector, a lower value for the Australian dollar, interest rates remaining stable and good agricultural harvests.

“Overall, there was a sense of increased confidence from respondents across many services sub-sectors,” the Ai Group said.

While a promising sign for the economy in the near-term, markets will want to see further evidence of strengthening economic activity in the period ahead.

As the saying goes, one swallow does not a summer make, but things certainly appear to be heading in the right direction.

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