Unemployment tipped to rise to at least 5.5% as services sector slumps

Australia’s unemployment rate is tipped to rise to at least 5.5% over the next six months, after a survey of small businesses in the services sector showed that sales, new orders and employment numbers fell in February – despite last year’s rate cuts.

The latest Australian Industry Group/Commonwealth Bank Australian Performance of Services Index fell 5.2 points to 46.7 points in February, below the 50 point separating contraction from expansion.

The 5.2-point fall was the largest fall in an overall sense since July 2009, says Michael Workman, senior economist at Commonwealth Bank of Australia.

Workman says the survey highlights the patchy economy, with small businesses in the services sector tending to bear the brunt of the shift to lower spending levels among consumers.

“The big message is we’re likely to see higher unemployment rates in Victoria and New South Wales, and that’s reflective of pressures on small business groups in the services sector where they’re getting quite sharp reversals in turnover,” he says.

Workman says with Victoria and NSW under pressure – the states account for more than half of Australia’s economic activity – the Reserve Bank will likely cut rates again.

But he cautions that last year’s two rate reductions seemed to have little effect on the PSI.

Workman says the businesses are being hit by a double whammy: weak consumer spending coupled with a cautious business sector.

“When these situations arise – consumers not spending and businesses disinclined to invest or expand – there’s a focus on cost, which normally suggests job reductions,” he says.

The only sectors shrugging off the gloom are finance and insurance and personal health.

The Ai Group and CommBank say reports of declining activity levels in February were common, with businesses reporting that sales, new orders and employment levels all slipped last month.

“The new orders component of the Australian PSI recorded a particularly sharp fall, and is now at its lowest level in over 12 months,” the groups said in a statement.

“In line with these soft trading conditions, the average selling price index declined in February, and is also at its lowest level in over 12 months.”