The Weakness In Australia's Services Sector Shows Why The Economic Transition Is So Slow

Getty/ Oli Scarff

If you are in a business which is closely related to the housing sector and the recovery in consumer sentiment then you are experiencing the economic transition Australia needs. Outside of that, in the vast majority of the economy, things are not so good.

That is the story of the difference in readings in the Australian Industry Group’s (AIG) Performance of Manufacturing survey (PMI), released Monday, and today’s Performance of Services Index (PSI).

While the PMI rose 2.9 points to 49.4, just shy of the 50 expansion level, the PSI, “dropped 1.8 points to 43.6 in October – its lowest reading since August 2013 and an eighth consecutive month of contraction for the services sector,” AiG said in a press release.

All of the sub indexes were below 50 with supplier deliveries down 5.8 points to 39.2 and stocks falling 4.8 to 37.6 – both 4-year lows. Importantly – and of deep concern given the ABS’s upward recalibration of the unemployment rate yesterday – was that last month’s move “in employment was short-lived, with the employment sub-index dropping 5.3 points into contraction at 46.8.”

Of the nine sectors in the PSI, only two – accommodation, cafes and restaurants (50.5) and personal and recreation services (51.0) were in expansion territory.

AiG CEO Innes Willox, said that the “The extended weakness in the services sector indicated by the Australian PSI is a major disappointment and reinforces concerns about the sluggish conditions across much of the local economy.”

But we wondered what the combination of the PSI and PMI tells us about the broader economy and the transition from the mining investment boom.

So we asked Dr Peter Burns, AiG’s Director of Public Policy, what he thought the big differences in the outlooks between the PMI and PSI meant.

Burns said that the depth of the recession in manufacturing and the “weeding out” this had caused in Australia’s manufacturing industry meant that those firms remaining were both “resilient” but also more exposed to the residential and commercial construction sectors and pick-up in consumer confidence.

Services is a much larger sector of the economy, so the impact of the improvement in these sectors has a more “diluted impact across the industry as a whole”, Burns said.

It’s another indicator that Australia is experiencing the economic transition the RBA wants but that it is both narrow and slow to filter out through the rest of the economy.

It’s also an indication that rates in Australia may well be on hold for another 12 months or more.

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