Services sector struggles to enter positive territory

The services sector remained in negative territory in December, according to the latest Australian Performance of Services Index, with ongoing weakness across consumer-related sub-sectors.

The PSI, released by the Australian Industry Group and the Commonwealth Bank, was 1.3 points higher in December but remained just below the 50-point level at 49 points.

A PSI reading above 50 indicates services activity is generally expanding, while a reading below 50 indicates it is declining.

While the overall result remains in negative territory, three of the nine sub-sectors expanded in the month, down from four in the previous month.

Professional business service sub-sectors appear to have stabilised over recent months, with activity expanding in December in finance and insurance, and property and business services.

However, household discretionary spending remains weak, affecting retail trade and accommodation, cafés and restaurants, all of which were soft in December.

Peter Burn, AIG director of public policy, says the lack of momentum in the services sector – as indicated by December’s PSI – underlines the flat conditions facing much of the economy.

“The somewhat stronger performance of business services sub-sectors contrasts with the ongoing weakness across most of the consumer-related sub-sectors,” Burn says.

“This points to continued wariness on the part of households, some of which reflects the lack of progress in resolving the European sovereign debt issues.”

CBA senior economist John Peters says the latest PSI reflects the “multi-growth speed pattern” across sectors and regions in the national economy, made worse by “substantial negative winds.”

“These headwinds include… the robust Australian dollar, which is punishing all export industries outside mining and import-competing industries like tourism and education,” he says.

Unfortunately, Peters says this pattern of growth is likely to continue in 2012.

“The Australian dollar is unlikely to substantially depreciate due to the ongoing high terms of trade, and there is no end in sight to Euroland’s chronic financial woes,” he says.

“On a brighter note, the RBA’s policy-easing moves in both November and December, which has seen the official rate cut by a total of 0.5% to 4.25%, should provide some boost to household and business confidence and to struggling segments of the economy, including the services sector.”

“We see the RBA moving quickly again on this front in the New Year and cutting rates another 0.25% in February. Any such move should help boost confidence and activity.”