Australia's massive services sector is continuing to expand -- but it's not all good news

Photo by Joe Raedle/Newsmakers

Activity levels across Australia’s enormous and hugely important services sector continued to improve in June, an impressive performance all things considered given uncertainty emanating from the UK Brexit vote and the Australian federal election.

The latest Performance of Services Index (PSI) released by the Ai Group earlier today came in at 51.3, down fractionally on the 51.5 level seen in May.

Like the better-known Purchasing Managers’ Indices (PMI), 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.

At 51.3, the index suggests that activity levels are improving modestly at present.

Across the surveys subindices there were mixed performances in June, although all of the major components continued to sit above the 50 level indicating that activity levels are improving.

Sales rose 1.1 points to 52.8 while the employment subindex jumped 4 points to 53.1, leaving it in expansionary territory for the first time since August 2015.

This indicates that hiring levels grew during the month, something that fits with recent strength in Australian job advertisement data. Perhaps as a consequence of the strength in hiring, the wage subindex rose 0.5 points to 50.8.

New orders, a forward indicator on future levels of activity, weakened fractionally to 51.8, down 3.5 points from May, although it too held above the 50 level indicating an improvement.

Elsewhere gauges on inventory levels ans deliveries contracted mildly.

The table below, supplied by the Ai Group, breaks down the June survey by individual component. The group uses three-month moving averages for the surveys subindices to provide a better indication of the overall trend in each.

While from a holistic perspective activity levels across the sector continued to improve, it was clear from the performance of individual industry sectors that it was entirely driven by strength in retail trade and finance.

“Two of the nine services sub-sectors in the Australian PSI expanded in June while two were stable,” said the Ai Group.

“Retail trade (up 5.1 points to 66.6) achieved a record high level of expansion, while finance and insurance again demonstrated strong growth (up 8.0 points to 66.8).”

This was offset by business-orientated industries which all saw activity levels contract, according to the Ai Group.

“Communication services (up 0.2 points to 44.7), wholesale trade (down 2.2 points to 42.0) and transport and storage (down 7.5 points to 36.2 – its lowest reading since January 2014) contracted further in June, while accommodation, cafes and restaurants experienced a second straight big drop (down 6.0 points to 36.3). Personal & recreation services (up 0.8 points to 39.9) recorded a third month of serious contraction,” it said.

Activity levels across health and community services (down 3.8 points to 49.4) and property and business services (up 0.2 points to 49.4), were largely were stable during the month.

In a nutshell it was a lumpy, uneven performance, fitting with the broader performance of the Australian economy at present.

It will be interesting to see whether business-orientated industries will see activity levels improve now that the election is over. Given current indications on the likely composition of the parliament, that appears anything but assured.

“While the election outcome remains uncertain, it is clear that more widespread growth across the sector is needed to put the rebalancing of the economy on a firmer footing and to consolidate the recent return to expansion of this important sector,” said Innes Willox, CEO of the Ai Group.

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