The great hope for Australia's economic transition is looking shaky

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Activity levels across Australia’s vast services sector declined for a fourth month in January, creating further doubts over whether the rebound in non-mining sectors of the economy will be sustained in the year ahead.

The latest Performance of Services Index (PSI) released by the Ai Group rose by 2.1 points to 48.4, indicating that the decline in activity levels moderated compared to December.

Despite the small uptick registered in December, the figure remained below the 50 level that indicates that activity levels are expanding.

The series three-month moving average, an indicator that helps smooth out month-to-month fluctuations to provide a better indication of the overall trend, fell to 47.6, the lowest level seen since January 2015.

Reflective of the broader index, only two of the surveys five activity subindices – supplier deliveries (51.0) and sales (50.2) – reported an improvement compared to a month earlier.

Worryingly, the new orders subindex – a lead indicator for future levels of activity – continued to deteriorate, rising 0.8 points to 46.2.

The surveys employment subindex also disappointed, falling 1.5 points to 47.2. It now sits well below the 12-month series average of 50.8, suggesting that the strength in recent labour market indicator may not be replicated in the early pasts of 2016.

Fitting with the weaker employment reading, the surveys wages subindex fell into contractionary territory for the first time since June 2009, dropping 1.4 points to 49.5.

The table below, supplied by the Ai Group, reveals the internal movements of the PSI report for January.

Like the activity subindices, only two of nine individual sectors reported that activity levels improved, indicating that the weakness was broad-based.

Innes Willox, Ai Group CEO, believes the January result reveals the fragile nature of the domestic economy at present.

“The weak start to 2016 for the services sector continues the easing of conditions evident over the last few months of 2015 and highlights the fragile and fragmented nature of growth in the domestic economy,” said Willox.

“Pockets of growth in the Australian PSI continue to be concentrated in the consumer-oriented sub-sectors such as health & community services, hospitality (hotels, cafes & restaurants), and personal & recreational services. Retail and wholesale trade continues to face uneven demand for consumer goods. In the business-facing sub-sectors (including professional services, finance, transport and IT), activity is patchy other than for businesses linked closely to capital city housing activity.”

Willox also suggests that the deterioration in service sector activity may also have implications for the upcoming federal budget.

“Notwithstanding the need to move to a more sustainable budgetary position, weakness in the services sector points to the risks of budgetary measures with near-term contractionary impacts,” Willox said.

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