Australia's services sector is humming at two-year highs

FRANK RUMPENHORST/AFP/Getty Images
  • Activity levels across Australia’s services sector improved at the fastest rate since late 2016 in March.
  • New orders, sales, employment and wages paid all improved from a month earlier.
  • The report follows news that activity levels in Australia’s manufacturing sector improved at the fastest pace on record over the same period.

Australia’s economy is in pretty good shape in early 2018, at least based off recent economic data.

Retail sales grew strongly in February, employment growth continues to hum along and activity levels across the nation’s manufacturing sector are improving at the fastest pace ever seen.

And now Australia’s services sector — the largest in the country and therefore the most important — is also gathering steam.

The Australian Industry Group’s (Ai Group) Performance of Services Indicator (PSI) rose to 56.9 last month in seasonally adjusted terms, up 2.9 points on the level reported in February.

The PSI measures changes in activity levels across Australia’s services sector from one month to the next. Anything above 50 signals activity levels are improving while a reading below suggests they’re deteriorating.

The distance away from 50 indicates how quickly activity levels are expanding or contracting.

So at 56.9, activity levels not only improved in February, they did so at the fastest pace since December 2016.

Activity levels have now improved in each of the past 13 months, the longest stretch of continued expansion since before the global financial crisis.

Source: Ai Group

Adding to the positive headline result, all five of the survey’s activity sub-indexes improved last month, including new orders which surged to 59.0, suggesting the momentum seen in March will continue in the months ahead.

Like the headline PSI, a reading above 50 indicates that activity levels improved from one month earlier.

“This was a third month of improving results,” the Ai Group said. “It suggests further growth ahead in 2018.”

Supplier deliveries surged 8.3 points to 61.3, leaving it at the highest level on record. Inventory level also rose to the highest level since February 2008, indicating that services firms expect demand to strengthen in the period ahead.

Sales, indicative of current demand, also improved to 55.0, the third consecutive month that sales grew at a faster pace than a month earlier.

Capacity utilisation across the sector also rose to 78.9%, well above its long-term average of 75.6%.

With current and expected demand likely to remain strong, firms also added staff at a faster pace with the employment index rising to 54.9, up one point on the level reported in February.

“Employment demand remains mixed across the services sectors, with stronger demand from business-oriented industries with generally higher level skills, but weaker demand across retail, wholesale and hospitality,” the Ai Group said.

That largely reflects the recent divergence between Australian business and consumer confidence readings.

Still, from a broader perspective, the strength in the employment index is a good sign for hiring levels going forward, especially as the services sector is the largest employer in Australia by some margin.

It’s yet another sign that unemployment — currently sitting at 5.6% — may start to decline again after a period of stability in the past six months.

Indeed, the Ai Group reported that wage growth also picked up, rising 5.7 points to 59.9 points, above the 56.9 average seen since May 2009.

“Wage pressures appear to be building up in higher-skill occupations and in the business-oriented sub-sectors,” it said.

Source: Ai Group

Mirroring the performance from the activity sub-indexes, a majority of sub-sectors also recorded stronger activity levels during the month.

“The more business-oriented sub-sectors reported that stronger demand from their customers in construction and manufacturing is benefiting their business activity,” the Ai Group said.

However, despite a positive Australian retail sales report for February, consumer-focused sectors continued to underperform.

“The two largest consumer-oriented sub-sectors remained slow in March,” the Ai Group said.

“Hospitality was relatively stable while retail trade contracted again in March in trend terms.

“Services businesses in these sub-sectors continue to report restrained discretionary spending among households due to slow nominal income growth and pressure on household budgets from housing, energy and other essential costs.”

While not a new development, it helps explain why few see the rebound in retail sales in February as the start of a longer lasting trend.

Following the release of manufacturing and services PMI reports for March in recent days, markets will receive the final piece of the jigsaw puzzle early next week with the Ai Group’s Performance of Construction Index due out on Monday.

It too has been strong recently, driven by strength in all sectors apart from apartment construction.

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