Services sector faces strong headwinds


The overall level of activity in the services sector remained soft last month, according to the latest industry data.

The latest Australian Industry Group/Commonwealth Bank Australian Performance of Services Index (Australian PSI) rose only 0.3 points to 48.8 to remain below the 50 point level separating expansion from contraction.

The seasonally adjusted index has been in negative territory for 10 of the past 12 months.

Expanding activity in the accommodation, cafes and restaurants, transport and storage, property and business and personal and recreational service sub-sectors was not enough to offset the weakness in the remainder of the services sub-sectors in July, particularly retail and wholesale trade.

Australian Industry Group Chief Executive, Heather Ridout, said: "Services businesses continued to experience mixed, and in the majority, soft trading conditions.

“While some are expressing enthusiasm about the flow on benefits from the resources boom, generally, the positive affects of the boom are being outweighed by consumer caution, interest rate concerns, a very flat construction sector and uncertainty over the impacts of proposed climate policy measures.”

Commonwealth Bank Senior Economist, John Peters, said: "The July Australian PSI revealing a small rise but still falling short of 50.0 further confirms other economic signals that a large chunk of the local economy continues to struggle for traction under the triple headwinds of a record high Australian dollar, past rate RBA hikes and a cautious and timid consumer saving madly and refusing to open the purse strings.

“Consumer anxiety has translated into a sharp lift in savings as a share of disposable income to 11.5 per cent in early 2011. Moreover, ongoing unsettling news from Europe and the US about their massive fiscal deficits and associated sovereign debt problems has further sapped both business and consumer confidence.”

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