Australia's economic transition is looking good

Getty/Mark-Kolbe

Australia’s economic rebalancing is looking like an unstoppable freight train right now. On the back of a strong December quarter GDP report released yesterday, a robust manufacturing PMI report for February and a jump in new home sales in January, now the nation’s vast services sector is joining in.

The latest services purchasing managers’ index (PMI) released by the Ai Group jumped by 3.4 points to 51.8 in February, leaving it above the 50 level that indicates activity levels are expanding.

It was the first time in five months that this has occurred, and marked the fastest expansion seen since September 2015.

Like the headline index, most of the surveys internal activity gauges expanded during the month.

The most impressive performances came from sales and new orders, suggesting that both current and future demand remains strong.

The surveys sales index jumped by 5.5 points to 55.7 while the separate new orders gauge rocketed back into expansionary territory, surging 7.4 points to 53.6.

Despite the strong performances from sales and new orders, the only area of disappointment came from the employment subindex. While it increased by 0.5 points, it still held in contractionary territory at 47.7, indicating that staff numbers were shed.

Although jobs numbers continued to decline, the surveys wage subindex – having fallen below 50 for the first time since June 2009 in January – rebounded by 4.6 points to 54.1, indicating that wages growth resumed in February.

The table below, supplied by the Ai Group, reveals the movements in the surveys components during the month.

While the activity subindices largely impressed, the news was nowhere near as strong when it came to the performance of individual sectors.

Only three of the surveyed nine industries saw activity levels expand, indicating that while in overall terms activity levels grew modestly, the improvement was narrow in nature.

Health and community services, personal and recreational services and finance and insurance were the only sectors that saw activity levels expand from January, fitting with the recent composition of Australian jobs growth.

Surprisingly, the hospitality sector – comprising hotels, cafes and restaurants – fell back into contraction despite record international passenger arrivals over the course of last year.

Innes Willox, Ai Group GEO, offered cautious optimism towards the February result.

“The bounce in the services sector in February is a tentative yet positive sign that consumer confidence is strengthening. Sales and new orders were both stronger in February with the consumer-facing sectors of health & community services and personal & recreational services showing the most convincing signs of growth,” said Willox.

“In contrast, the more business-facing sectors of property & business services, wholesale services, transport & storage services and communications services were all weaker in February. While the return to expansion is clearly encouraging, the picture painted by the survey is still one of fragility and vulnerability. This should be a warning to policy makers against an excessively restrictive Federal Budget in May and highlights the room for a targeted lift in incentives for business investment.”

While the narrow-base of improvement remains a concern, after four months of contraction the February result is pleasing nonetheless. With the RBA banking on household consumption to accelerate in the year ahead, the key now will be foster a recovery in the broader services sector. As yet that’s yet to take place, ensuring the possibility of further monetary policy stimulus remains.

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