Further weakness in services sector

Cautionary consumer spending and the waning influence of fiscal stimulus continued to drag down the services sector last month.

The latest seasonally adjusted Australian Industry Group/Commonwealth Bank Australian Performance of Services Index (Australian PSI) fell 2.2 points to 46.6 in July (below the 50 point level separating expansion from contraction). 

The result is in line with the soft conditions experienced in services over the first half of the year.

The tightening of consumer purse strings was felt across the sector with sales and deliveries both falling at a faster rate in the month. 

Across the sector, personal and recreational services experienced a significant decline following a strong June result while retail trade continued its poor performance.  Finance and insurance services was the only sub-sector to expand in July.

Australian Industry Group Chief Executive, Heather Ridout, said: "Both consumer-related services and business services fared poorly in July reinforcing the picture of a gradual and uneven recovery. Caution from consumers and businesses is preventing a more convincing and widespread recovery from taking hold.

"With private sector demand yet to assert itself as a sustaining feature of the recovery, the Reserve Bank’s decision not to raise interest rates was clearly the right call and the RBA should take a wait and see approach for some time yet," Ms Ridout said.

Commonwealth Bank Senior Economist, John Peters, said: "Local consumers remain wary in face of the six RBA rate hikes since October 2009, and are devoting financial resources to balance sheet repair.  This factor, together with the expiration of the Federal Government consumer targeted fiscal stimulus packages, has ensured consumer spending has been lacklustre so far this year. This consumer torpor is reflected in weak activity in sectors such as retail trade, and accommodation, cafes and restaurants.

"On a more positive note, in wake of the tame second quarter CPI, the RBA is unlikely to lift rates for some months which should cheer up consumers.”