Australia’s services sector is contracting at an ever increasing pace as the Reserve Bank of Australia uses a blunt tool, interest rates, to slow down inflation from Australia’s rampaging resource sector.
Falls in activity in Australia’s communications and finance & insurance services sub-sectors contributed to the worst result of the Australian Industry Group/Commonwealth Bank Australian Performance of Services Index (Australian PSI) since July last year, with the index falling 1.9 points in the month to 45.6 in September (readings below 50 indicate a contraction in activity).
Personal and recreational services were the only sub-sector to expand in September, with all other sectors dragging the Australian PSI even further below the critical 50 point level as the RBA’s interest rate increase in May continued to hit flow through the Australian economy.
Australian Industry Group Chief Executive, Heather Ridout, attributed the slump in services activity to a number of factors.
“September’s result indicates a continuation of the weakness that has been seen across the services sector for most of the year. A wide variety of factors appear to be contributing to this weakness including tentative consumers and businesses influenced by political uncertainty, volatility in the global economy, the prospect of higher domestic interest rates and the ongoing withdrawal of fiscal stimulus.
“The pressures on businesses across the services sector would intensify if interest rates were to rise when sales are sluggish and employment in the sector is waning,” Mrs Ridout said.
Commonwealth Bank Senior Economist, John Peters, felt consumers were saving rather than spending, possibly having learned something from the global financial crisis.
“The latest Australian PSI readings are consistent with ongoing soft retail sales readings in recent months and for much of 2010 for that matter. On this score, the RBA said in its latest Financial Stability Review that household balance sheets are improving and consumers continue to prefer saving over spending.
“But this consumer restraint may start to wane in the quarters ahead given the jobs market is so healthy, wages and salaries are picking up, and household wealth is rising via the lift in share and property prices in the past year. Consumers are thus likely to be increasingly less diligent about balance sheet repair, and will likely lift their spending levels,” Mr Peters said.
