Australia's massive services sector is contracting again

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The RBA left rates on hold yesterday highlighting both that “the prospects for an improvement in economic conditions had firmed a little over recent months” but also that “the outlook for inflation may afford scope for further easing of policy, should that be appropriate to lend support to demand.”

In many quarters the RBA’s comments could be viewed as a bet each way. But, in other camps, the one I’m in, it is a recognition that perhaps the lack of pricing power reflects a little softening in conditions within the domestic economy at the moment.

That makes the big fall in the AiGroups performance of services index (PSI) important for those trying to read the tea leaves of the RBA and the economy.

After four months in the expansion zone the PSI dropped 3.3 points to a seasonally adjusted print of 48.9. That’s back in the contraction zone and signals some headwinds for Australia’s massive services sector.

AiGroup said that “only two of the five activity sub-indexes were above 50 points: services sales (down 7.8 points to 50.6) expanded for a fifth month, albeit very mildly; and supplier deliveries were stable for a third straight month (up 0.3 points to 50.3).”

New orders growth paused, stock levels fell heavily and now sit at 45.2 while employment contracted for the second month in a row to sit at 48.

AiGroup Chief Executive, Innes Willox, summed up the sobering release saying:

The dip in services sector activity in October is a clear reminder of the fragility of the economy as it transitions to a more balanced pattern following the mining investment boom and the fall in commodity prices. The services sector is critical to this transition and the loss of momentum in October fuelled by a retreat of new orders and employment and a sharp reduction in sales growth will add to the case for additional stimulus, particularly in the absence of wage and price pressures.

Retail sales are out later today and if the NAB’s online retail sales are any guide it should be a strong report. But the AiGroup’s set of indicators of Australian business, manufacturing, services and construction suggest the economy might have hit a flat patch.

That puts the RBA in play in 2016.

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