Australia's enormous services sector continues to struggle

Photo by Chris Ratcliffe/Getty Images

Activity levels across Australia’s massive services sector continued to splutter in April, casting further doubt on the outlook for hiring, household spending and overall economic growth

The Ai Group’s performance of services index (PSI) rose 0.2 points to 49.7, suggesting activity levels were basically unchanged compared to levels seen in March.

Like the more widely-recognised PMI indices, the PSI measures changes in activity levels from one month to the next. Anything above 50 signals growth, while anything below that level means contraction -— so the higher the number the better.

Despite the modest increase registered in the headline index, most of the survey’s internal components improved in April, although most remained below the 50 level, signalling a contraction.

Sales rose 0.3 points to 49.7 while forward orders, a lead indicator for future levels of activity, held steady at 51.9, indicating a modest increase in new work.

In what is a concern, given the number of Australians employed in the sector, the employment gauge rose 0.3 points to 48.1, suggesting that job shedding occurred at a slower pace than March.

The subindex has now contracted for eight consecutive months, something that is worthwhile watching moving forward given it coincides with the steep deceleration in hiring seen in the official ABS jobs data.

For those in employment, the gauge measuring average wages rose by 3.6 points to 57.8, providing an indication that wage pressures may be building.

The chart below, supplied by the Ai Group, has all the main details.

By individual sector, five of the nine sectors surveyed recorded readings of 50 or above. Finance and insurance (up 6.5 points to 60.7) and health and community services (down 4.3 points to 54.2) were the strongest performers for the month.

Offering hope that retail spending may be picking up following a lacklustre few months, activity levels at retailers expanded for the first time in seven months.

Although a mixed, and by-and-large disappointing report, Ai Group CEO Innes Willox believes that the boost provided by lower interest rates and the federal budget should help to underpin confidence and activity levels in the months ahead.

“The large and diverse services sector trod water in April,” said Willox.

“While there is likely to be some further hesitation by both businesses and consumers ahead of the federal election, the combination of the Reserve Bank’s interest rate cut and the pro-investment business tax measures announced in the Budget is likely to boost confidence and services sector activity over coming months.”

Given so much of the budget’s forecasts are premised on continued strength in household consumption, let’s hope he’s right.

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