Australia's economic renaissance just received a major reality check

Photo: iStock

Earlier this week we learned that Australia’s manufacturing sector enjoyed its best month in 15 years in February, helping to build confidence that the Australian economy was strengthening in early 2017.

Well, that view has received a serious reality check today.

Australia’s services sector — far larger and important to the broader Australian economy — contracted last month.

The Ai Group’s Performance of Services Index (PSI) fell 5.5 points to 49.0, leaving below the 50 level for the first time since September last year.

That just happened to correspond with the shock 0.5% contraction in Australian Q3 GDP, the largest decline reported since the global financial crisis.

The PSI measures changes in activity levels across Australia’s services sector from one month to the next, and ranges from a score of 0 to 100.

50 is deemed neutral, with anything above this level indicating that activity levels improved. A reading below 50 suggests activity levels declined. The distance from 50 indicates how quickly activity levels improved or declined compared to a month earlier.

So while activity levels weakened last month, the decline was not large in scale.

It’s not horrendous, but it’s not great news either.

According to survey respondents, problem areas in February included lower demand from mining customers, lower spending by households and adverse local weather events such as the eastern heatwave, a lack of rain and local storms

And, like the headline PSI figure, the internals of the report were also weak with four of the five activity subindices contracting during the month in seasonally adjusted terms. That also included new orders, a forward indicator on likely activity levels in the future.

This table from the Ai Group reveals the disappointing internals of the report.

Source: Ai Group

However, suggesting that the weakness across the sector was not broad-based, the Ai Group said that six of the nine services sub-sectors expanded in February in trend terms.

“Wholesale trade continued to grow strongly, while finance and insurance also expanded more strongly,” it said.

“Personal and recreational services, retail trade, property and business services and health and community services also expanded.”

That helped to partially counteract declines in the hospitality, transport and communications sub-sectors.

The strength in the retail subindex — an important measure on household consumption levels — was particularly pleasing, lifting to 54.3 points, the highest level in seven months.

“Respondents said the weather, discounting activity and demand generated by the housing cycle were positive factors for retailers in February,” said the Ai Group.

That also flowed through to wholesalers whose subindex rose to 61.1, the highest level since the survey began in 2003.

So despite the disappointing overall result, there were pockets of strength that suggest the weakness in February may have been an aberration, rather than the start of a trend.

We’ll find out that answer when the March report is released in early April.

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