Services sector subdued in December

Ongoing interest rates rises and strong exchange rates saw the services sector continue to underperform in December, with the Performance of Services Index up just 0.2 points to 46.4 points.

The report, released by the Australian Industry Group and the Commonwealth Bank, states: “In three-month moving average terms, the Australian PSI has remained broadly unchanged over the second half of 2010, and well below the critical 50 point level separating expansion from contraction.”

“Consistent with this, the selling price and input price sub-indices have remained relatively stable since the start of the year, and are well below the levels recorded before the global financial crisis.”

“This is consistent with the relatively modest pace of underlying inflation seen over the past six months continuing into the December quarter.”

According to the report, activity fell in property and business services, and finance and insurance, as a result of continual interest rate rises and the strong Australian dollar.

AIG chief executive Heather Ridout says the prospects for a positive start to 2011 are unlikely.

“The soft conditions in December were particularly noticeable in the business-related services sub-sectors. This suggests that businesses are hesitating to spend in the face of fading expectations of a pickup in sales,” Ridout says.

The report reveals Queensland and Victoria recorded particularly subdued conditions in December, while Western Australia recorded strong growth as a result of the mining boom.

Wholesale trade was the strongest performing sub-sector in December at 72 points. Other sub-sectors which performed well were hospitality, and personal and recreational services.

However, employment in the services sector fell for the fifth consecutive month.

CBA senior economist John Peters says even though the findings are disheartening, they are consistent with other economic data, which shows slow retail sales amid cautions consumer behaviour.

“Other recent data has shown that nervous consumers are increasingly salting their cash away for a rainy day and paying down debt in anticipation of more RBA rate hikes over the next year,” Peters says.

“Indeed, the early December release of third quarter GDP data revealed the household savings ratio surging to 10.2%.”

Despite the statistics around household saving, Peters is optimistic about consumer spending in 2011.

“A continuing pickup in local growth, an associated further firming in jobs markets and an unemployment rate dipping under 5%, together with solidly rising incomes and wages, are likely to entice consumers to spend more in 2011,” he says.