More fuel on the RBA rate cut fire as Australia's service industry contracts again

Photo: Getty/annah Johnston

Australia’s massive services sector has slipped back into negative territory according to the Ai Group which released its April Performance of Services Index (PSI) this morning.

It’s a disappointing result, with the PSI slipping half a point to 49.7 after two months above the 50 expansion/contraction line.

You can see in this release why the RBA’s decision to cut – if they do – won’t surprise anyone. The Ai Group said:

Only one of the five activity sub-indexes expanded (i.e. above 50 points) in April, with the employment sub-index increasing 3.4 points to 54.6. New orders (down 2.0 points to 48.1) returned to contraction after three months of expansion while the recently patchy services sales sub-index also slipped back 4.6 points to 48.0. Supplier deliveries contracted for a second month (down 1.9 points to 47.5) while services businesses reduced their stock levels for an 11th consecutive month, if at a slower pace (up 5.2 points to 48.7).

That suggests the recent strength might have been a false dawn.

But while the activity sub-indexes make depressing reading, five of the nine service sub-sectors expanded.

Finance & insurance services (down 1.0 point to 72.0) continuing its recent strong performance while health & community services expanded for a sixth consecutive month, although at a slower pace (down 6.0 points to 51.5). Retail trade (up 1.4 points to 54.0) and personal & recreational services (up 3.4 points to 53.8) each repeated last month’s expansion, and accommodation, cafes & restaurants ended five months in negative territory (up 4.8 points to 50.9).

Tying it all up, it’s clear the economy still faces headwinds but even the depressed state of the PSI points to a pick up in domestic final demand. That, along with the “11.4-point spike in input costs to 72.6 – the highest level since October 2008”, suggests the inflationary pulse of the Aussie dollar’s falls has more than offset any energy related savings.

But the RBA will be expecting that, so there is nothing in this release to dissuade the RBA from cutting today.

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