Services sector hits lowest level since March 2009

SHARP falls in sales and new orders pushed the services sector deeper into negative territory in July.

The latest Australian Industry Group Australian Performance of Services Index (PSI) fell 2.1 points to 39.4 in July, its lowest level since March 2009.

Readings below 50 represent a contraction in activity, with the distance from 50 indicative of the strength of the decrease.

Outside the GFC-related downturn in 2008-09, this is the first time the PSI has fallen below 40 points.  The sales sub-index for services fell to 34.9 points in July, its lowest level since April 2012.  And at 34.3 points, the new orders sub-index for services is at its lowest level since March 2009 and has been in contraction (below 50 points) since June 2012. 

Around one in five services businesses believe the uncertainty associated with the forthcoming Federal Election is the main factor currently affecting their activity and forward orders.

"The services sector started the new financial year with a disappointing slump in sales and new orders," said Ai Group Chief Executive, Innes Willox

"While recent interest rate cuts have brought some cost relief to Australian businesses and the fall in the Australian dollar is very welcome, their effects are yet to show up in stronger sales. 

"The retail sector reported another sharp contraction in July, while the index for the hospitality sector fell to its lowest level since May 2012. 

"Businesses providing personal and recreation services and health services to consumers are faring better, with both sectors showing a mild expansion in July.

"Activity in the business-oriented services sectors remains weak.  The wholesale trade and transport and storage sub-sectors continued to contract in July, in line with low levels of demand from retail, manufacturing and construction.  Communications, finance & insurance and property and business services also contracted sharply during July.

"Of particular concern for the immediate outlook, employment in the services sector remained in contraction for a fourth consecutive month. Further, business margins remain under intense pressure, with the PSI indicating strong rises in input prices and particular weakness in selling prices. Together with the sharp contraction in new orders in July, this margin pressure does not suggest a pickup is imminent in activity or employment over the next few months."

PSI - Key Findings for July:

  • The PSI fell by 2.1 points to 39.4 in July driven by sharp falls in sales and new orders.
  • Businesses reported that recent interest rate cuts and the depreciation of the Australian dollar have had little if any impact so far on activity in the services sector.
  • The retail trade index fell 6.3 points to 41.3 in July and has been below the 50 point level separating expansion from contraction for 10 of the past 12 months.
  • One in five businesses noted that the most important factor affecting their business activity in July was the uncertainty associated with the upcoming Federal Election.
  • On top of the tough demand conditions facing the sector, the input prices index is at its highest level in 10 months while the selling price index fell back in July to its third lowest reading in the history of the series.

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