Services sector struggles in wake of floods

Floods, rising interest rates and the high Australian dollar saw the services sector slow down even further in January, falling 0.9 points to 45.5 points as households continue to save.

The latest Australian Performance of Services Index, released by the Australian Industry Group and the Commonwealth Bank, reveals weakness is evident in both the sales and employment sub-indices.

According to the report, accommodation, cafes and restaurants, transport and storage, and health and community services were the only sub-sectors to expand in the month.

Activity contracted significantly in the retail, wholesale, communication, finance and insurance, and personal and recreational services.

This was reflected in employment, which fell for the sixth consecutive month, and was concentrated in wholesale, retail, and finance and insurance.

“The transport and storage sector was the only services sub-sector to record employment growth during the month, while employment was reported to be broadly unchanged in the hospitality, property and business, and communication sub-sectors,” the report states.

The pace of wage growth was strongest in the hospitality, and finance and insurance sub-sectors, but was reported to be “relatively modest” in retail, and personal and recreational services.

Among the states, weakness in sales and new order levels were most evident in flood-stricken Queensland and Victoria, while activity also fell in NSW due to flooding.

“Outside of these states, activity was broadly unchanged in January, with the activity index of Western Australia remaining at an elevated level,” the report says.

According to AIG chief executive Heather Ridout, the services sector is in a state of uncertainty as the full impact of the flooding is yet to unfold.

CBA senior economist John Peters agrees the poor performance of the services sector in January is not surprising give the “negative economic headwinds buffeting services’ businesses at present.”

“These headwinds include the high Australian dollar, rising interest rates over 2010, and the onset of the catastrophic Queensland and Victorian floods in January, which further torpedoed business and consumer confidence and activity,” Peters says.

“Recent RBA credit data confirms that both consumers and businesses continue to deleverage –increasing their savings and paying down debt – in [the] wake of the GFC; not a stimulating dynamic for service industries generally.”

“In particular, this consumer caution is being accentuated by frequent and widespread reports in the media of more RBA rate hikes over the next year or so.”

Meanwhile, the latest forecast by market research agency Datamonitor shows Australian household savings are expected to grow strongly in the next five years, indicating businesses will have an uphill battle in enticing consumers to spend.

According to Datamonitor, more than $238 billion of new household savings are expected in the next five years, with Australian household savings across all banks to reach $694 billion by 2015.