Australia's all-important services sector may have a problem


Activity levels across the nation’s vast services sector declined for a second consecutive month in November with the Ai Group’s services PMI gauge slipping 0.7 points to 48.2, creating a niggling doubt over the strength of the recovery in Australia’s non-mining sectors,

As is the case with other PMI surveys, a reading below 50 suggests activity levels are contracting.

Adding to the worrying headline print, all five subindices that make up the survey came in below the 50 level that separates expansion from contraction, indicating the weakness seen in November was broad-based.

Sales dipped 1.4 point to 49.2 while new orders, a harbinger for future demand, slid 1.6 points to 47.3. Supplier deliveries fell 1.8 points to 48.5 while stocks, despite a bounce of 4.5 points, held in contractionary territory at 49.8.

Perhaps more concerning than all of those readings combined, the survey’s employment subindex fell 0.9 points to 47.1, a somewhat disconcerting outcome given the vast majority of Australians are employed in the services sector.

Reflective of the weakness in the survey’s employment gauge, average wages slid 6.9 point to 50.9, an unwelcome development for household consumption given it is required to help power Australian economic growth in the years ahead.

From an industry-specific perspective, five of the nine services sub-­sectors in the Australian PSI saw activity levels decline in November, suggesting growth remains patchy and fragile.

The Ai Group noted that “conditions still vary significantly across sub-­sectors, with ongoing weakness in communications and wholesale trade.”

According to Innes Willox, Ai Group chief executive, the weak outcome is a reminder of the fragility of the domestic economy at present.

“A second consecutive disappointing month for the services sector is a timely reminder of the fragility of the domestic economy as it struggles to restructure and generate new sources of growth in the wake of the mining investment boom,” said Willox following the release of the November PMI report.

“Demand across the diverse services sector was patchy with contractions in the retail, wholesale, communications and property & business services sub-sectors together with slower growth in financial services and health & community services outweighing a strong lift in personal & recreational services in November. Retailers will be hoping for a rush in the next few weeks to make up for the slow start to the Christmas trading period.”

While PMI gauges can be volatile month-to-month, the trend in services sector activity is softening with the three-month series average moving lower following two months of consecutive declines.

This is a worrying outcome as the PMI report is as close to a real-time snapshot on what is occurring in the sector. Although recent employment data has been strengthening, it is a lagging indicator with recent weakness in the services sector pointing to a potential weakening in labour market conditions ahead should activity levels across the sector continue to deteriorate.

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