Australia's massive services sector roars back to life

Australia’s massive services sector – the largest in terms of economic output and employment – is back in business, expanding at the fastest pace seen since before the global financial crisis.

In August the AiGroup performance of services index (PSI) soared by 1.5 points to 55.6, the highest level seen since March 2008.

A reading above 50 indicates that activity across the sector is expanding – so 55.6 indicates that activity is now humming.

According to the Ai Group, three of five activity sub-indexes expanded during August. Sales (up 4.5 points to 65.4) and new orders (up 3.9 points to 56.9) sub-indexes expanded for a third month, while employment (up 0.8 points to 52.5) rose for a second month.

Supplier deliveries were stable (down 1.0 point to 50.0), but services businesses reduced their stock levels (down 6.4 points to 44.1) after a brief expansion July.

The table below shows the evolution in each of the various activity sub-indices, comparing August’s results to that of July and the average of the past 12 months.

Across various industries, five of the nine surveyed sectors expanded with finance & insurance services (up 0.5 points to 65.5) expanding for an eighth month, while retail trade (up 3.0 points to 56.8) spent a sixth month in positive territory.

Conditions in the property and business services sub-sector (up 3.9 points to 58.5) continued to improve, and the very large health & community services sub-sector (up 6.2 points to 52.9) returned to growth after two months of mild contraction.

While those sectors expanded, personal and recreation services (down 5.0 points to 41.5), communications (up 0.7 points to 39.6), and transport & storage (up 8.9 points to 48.0) all contracted.

While not all sectors enjoyed a robust month, the surge in the retail trade sub-sector was particularly impressive. Retail is the largest employer across the country with the reading, sitting at the highest level since October 2009, indicative of not only a labour market that is starting to strengthen, but also that consumption may have turned a corner also.

Reflective of the impressive headline figure, Innes Willox, Ai Group Chief Executive, believes the reading suggests that the economy may have strengthened in recent months having slowed to a crawl in the June quarter.

“The further expansion in the services sector in August, as indicated by Ai Group’s Australian PSI, stands in contrast to the slow economy-wide growth recorded by yesterday’s June quarter National Accounts release,” said Willox.

“This suggests that the economy has strengthened somewhat over the past couple of months and that we are gradually finding sources of growth to balance the further fall in mining-related investment. With new orders for businesses in the services sector recording solid gains, there are good reasons to expect a continuation of services sector expansion over coming months”.

Certainly the result suggests that conditions across Australia’s massive services sector are improving rapidly – something that can only assist overall economic conditions in the period ahead.

Given the strength of the PSI report, today’s Australian retail sales report will be even more closely examined that usual, particularly given the strength in the retail sub-sector. Markets are expecting a moderation in growth to 0.4% from 0.7% in June.

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