Australia's latest services sector report card suggests 'momentum in the economy may be fading'

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Activity levels across Australia’s enormous services sector improved for a third consecutive month in May, although at a slower pace than in April.

The Ai Group’s Performance of Services Indicator (PSI) fell 1.5 points to 51.5, pointing to a marginal improvement in activity levels from one month earlier.

The PSI measures changes in activity levels across Australia’s services sector — the largest in the country — from one month to the next. Anything above 50 signals that 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 activity levels continued to improve, albeit at a slower pace than in April.

Fitting with slight moderation in the headline PSI index, the Ai Group said that only three of the survey’s five activity subindices expanded in May.

“Sales increased but at a slower pace than April, at 52.5 points, new orders dropped to 52.8 points and the stocks index rose by 6.6 points to 53.6 points, moving from contraction into growth,” it said.

“Supplier deliveries experienced stable conditions (50.2) while employment fell into contraction at 49.2 from expansion in April.”

The weakness in the latter is particularly disappointing given the sector is the largest employer across the country, and helped to offset continued growth in new orders which is a good sign for overall activity levels in the month’s ahead.

This table from the Ai Group shows how individual activity subindices fared during the month.

Source: Ai Group

The group said that the jump in inventory levels — the largest improvement of any component during May — followed a period of weakness in the preceding 12 months.

“Nine of the past 12 months have seen a contraction in stocks, indicating a general decline in inventory levels across the services sector over that period,” the group said, noting that inventory levels had also fallen in each of the prior four months.

Whether the increase was due to an expected lift in customer demand from firms, or a sign that actual demand levels are weakening, is as yet unclear. That’s something that should be watched closely in the months ahead, particularly in relation to the sales subindex given the relationship between the two.

By individual sector, the Ai Group said that the improvement in the headline PSI was driven by some of the largest industries, masking continued weakness in other areas.

“Three of the larger sub-sectors expanded in May with results above 50 points,” it said.

“Property and business services continued to grow strongly in May, at 56.8 points. The hospitality sector — accommodation, cafes and restaurants — rose by 2.5 points to 54.5 points while the wholesale trade sub-index reduced slightly to 53.7. Transport and storage was stable at 50.6 points, a similar result to April.”

However, that improvement was not unilateral across the broader sector, it said.

“Finance, retail trade, health and community services and communications services shrank at similar rates to the previous month. Personal and recreational services fell by 3.4 points to 43.9 points in May, indicating a faster rate of contraction,” it said.

In particular, the group said that activity levels across the retail sector — the second-largest employer in Australia behind health — weakened for a second month, led by tepid customer demand.

“Participants from this sub-sector said lack of customer demand and reduced trade flowing through from weak mining activity had an adverse effect on sales in May,” the Ai Group said.

That was part of a broader trend with AiG saying that respondents from weaker sectors reported “lower consumer confidence and spending, plus some reduction in demand from the mining sector and from business customers”.

It also noted that weaker demand was noted especially in Western Australia and South Australia.

Of those sectors that reported improved activity levels, it said that many cited “stronger demand from government, the agriculture sector and infrastructure projects” as supportive factors.

Innes Willox, CEO of the Ai Group, said that the May report pointed to “patchiness across the services sector”.

“There is some support for the concern that recent momentum in the economy may be fading,” he said. “This fragility in the economy highlights the importance of the stimulatory impacts of the reduction in the tax burdens of small and medium-sized businesses.”

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