Australia's services sector is sliding as spending concerns linger

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Growth in Australia’s services sector continued to slow in October, and activity in the sub-indexes for hospitality and retail remain particularly subdued.

The Ai Group’s Performance of Services Index (PSI) fell by 0.7 points to 51.4 in October in seasonally adjusted terms.

“Respondents in retail and hospitality are reporting weak spending by consumers due to a mix of increased household electricity costs and hesitant consumers,” the Ai Group said.

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

So while the October figures show that the sector continues to expand, the pace of that expansion has continued to slow in recent months after hitting a nine-year high in July.

Source: Ai Group

Of the five activity sub-indexes in the report, sales was the only one to contract in October, falling by 4.8 points to a reading of 48.1 — the first month of contraction in sales since February.

Growth in new orders (51.7) and supplier deliveries (51.7) both expanded, but at a slower rate than September.

Those sluggish indicators were offset by a faster rate of growth in employment (53.3) and inventory (54.8).

“Capacity utilisation across the services sector grew by 1.8 percentage points to 78.9% of available capacity in October, remaining above the long term average of 75.4%,” the Ai Group said.

Source: Ai Group

Out of the nine sub-sectors in the report, five expanded in October while four contracted.

Of particular interest, the readings for hospitality (comprised of accommodation, cafes and restaurants) and retail sales remained firmly in a contractionary state, as was the case in September.

Hospitality reported a reading of 36.2, slightly up from the record low in September although it remains at the lowest level since 2013.

The retail trade measure also showed a continued decline but at a slightly slower pace, with an October reading of 44.4 points (up from 43.1 in September).

The numbers indicate that the retail sector remains subdued, ahead of this morning’s monthly benchmark retail sales figures from the ABS, which are coming off a bad miss in August.

Retail businesses in the Australian PSI say competition from online and offshore sellers continues to grow as consumers become more comfortable with purchasing from online platforms,” the Ai Group said.

“Households are also facing increasing costs for essentials, as energy and housing costs rise and wages growth remains slow.”

The October reading for hospitality marked 22 months of contractionary conditions in the sector, as consumers choose to spend their money in other areas.

Among the other sub-sectors, “activity accelerated in personal and recreational services (66.4) and property and business services (58.0) while growth across finance and insurance (55.7 points), communications services (54.9) and wholesale trade (51.2 points) moderated,” the Ai Group said.

Rounding out the nine sub-sectors, there were contractionary readings for health and community services (47.1), transport and storage (43.3).

Among the price indexes, input prices rose by 4.4 points to 61.2 in October, with rising energy costs cited as a key source of cost pressures.

The wages sub-index fell slightly, down by 0.5 points to 55.8 in October, indicating that no immediate driver of rising wages in Australia appears evident.

On the inflationary front, the sub-index for selling prices rose by 3.3 points, climbing back into expansionary territory at 50.7.

“In the past year there have only been three months in which prices have risen,” the Ai Group said.

“This reflects the price dampening effects of the higher Australian dollar in mid-2017 (which makes imported goods and services cheaper) coupled with an extremely competitive market, relatively weak inflation and relatively weak consumer demand for discretionary goods and services.”

As was the case in September, respondents from the construction and mining sectors reported the strongest level of demand in the survey.

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