Australia's most important sector is accelerating

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It’s not only Australia’s manufacturing sector that’s humming at present. The nation’s services sector, far larger and economically important, is also showing signs of life.

That’s the good news to come from the latest Australia Performance of Services Index (PSI), released by the Ai Group on Wednesday morning, with the index jumping by 2.6 points to 53.9.

Like the better known purchasing managers’ indices (PMIs), associated with the performance of the manufacturing sector, the PSI measures changes in activity levels across Australia’s services sector 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 53.9, the activity levels are now expanding at the fastest pace seen since August last year. Not a bad performance given all of the uncertainty generated by the federal election and UK Brexit referendum, along with the strengthening Australian dollar.

Mirroring the improvement in the headline index, most of the survey’s activity subindices improved compared to levels seen in June, led by an enormous surge in the gauge measuring sales.

It jumped to 59.4 points, up a whopping 6.6 points from June. The new orders subindex also edged higher, rising 0.4 points to 52.2, maintaining the solid expansion seen since February this year.

According to the Ai Group, the suggests “reasonably steady growth in new orders and positive conditions ahead”.

The measures on stocks and deliveries also increased with the latter hitting the highest level seen since February 2014.

Mirroring the improvement in those components, capacity utilisation across the sector jumped by 4 percentage points to 77.3%.

If there was one area of disappointment, it came from the employment subindex, an area that should be watched closely given the sheer number of Australians employed in the services sectors. It fell 3.1 points to 50, indicating that employment levels were static in July. Not the best of news, even if it’s a lagging indicator.

The chart below, supplied by the Ai Group, looks at the movements in the survey’s activity subindices, comparing the result to those of June and also the average over the past year. The Ai Group uses 3-month moving averages for the survey’s components to smooth out month-to-month volatility.

While the news on activity levels was largely pleasing, the composition of the improvement was not. It was narrowly-based, driven by strong performances from a minority of sub-sectors monitored.

The Ai Group explains:

Three of the nine services sub-sectors expanded in July and two were stable. Retail trade (65.0 points), finance and insurance (62.0 points) and communication services (53.2 points) expanded in July. The very large health & community services (50.2 points) and property & business services (49.1 points) sub-sectors were stable in July. Wholesale trade (48.9 points), personal & recreational services (46.7 points), hospitality (40.3 points) and transport & storage (33.6 points) all contracted, with transport services recording its weakest conditions since 2013.

While the retail trade sector put in a robust performance, the Ai Group notes that an unusually cold and wet winter was “proving to be a positive influence on winter sales”. In other words, depending on what the weather does, the strong expansion may not last.

Still, it bodes well for the release of upcoming retail sales reports from the ABS, one of which will arrive on Thursday.

Though Australia’s banks have only passed on a proportion of the rate cut delivered by the RBA on Tuesday, Innes Willox, CEO of the Ai Group, believes that the rate reduction will likely help to boost activity levels in those sectors that are struggling at present.

“As long as lower rates are passed on by the banks, the decision yesterday by the Reserve Bank to reduce interest rates should provide a boost to business and consumer demand in these lagging sub-sectors,” he said.

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