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Services sector remains subdued in June

08-07-2010
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Another fall in new orders together with a drop in inventories and selling prices kept the services sector in negative territory in June. 

Reinforcing the subdued conditions experienced in the sector this year, the Australian Industry Group/Commonwealth Bank Australian Performance of Services Index (Australian PSI) remained below the 50 point level separating expansion from contraction for the second consecutive month. 

However, the rate of contraction eased slightly, with the Australian PSI up 1.3 points to 48.8. 

Many of the consumer-based subsectors remained in the red in June including retail trade which has not had an expansion in activity for eight months. Despite the soft conditions, employment in the services sector grew in June.

Australian Industry Group Chief Executive, Heather Ridout, said: "The services sector as a whole has had very little to cheer about for well over six months. It has struggled under the impact of successive interest rate rises and the phase-down of fiscal stimulus.

"The performance of the sector reinforces concerns that despite some predictions to the contrary, very important segments of the economy are stuck in the slow lane. The disappointing fall in new orders suggests there is little prospect of acceleration over the next few months. Given this environment and the growing global uncertainty, we would expect that interest rates will remain on hold," Ms Ridout said.

Commonwealth Bank Senior Economist, John Peters, said: "Australian household spending (including retail sales) has been subdued since the 'fadeout' of the Federal Government’s short term fiscal cash handouts and on the back of six successive rapid fire RBA rate hikes. This economic dynamic has been reflected in continuing weakness in services sector activity, which has centred on consumer-based sectors like retail trade and accommodation, cafes, and restaurants.

"However, the fundamentals underpinning household spending remain strongly positive. The labour market is in robust health producing a rich crop of jobs, and hours worked continues to climb, boosting household incomes. Although house and equity prices have eased in recent months, large increases have been posted in both categories since the start of 2009, enhancing overall household wealth. Looking ahead as labour market conditions tighten further, and consumers realise local economic growth is strengthening not faltering, household spending (including retail sales) is likely to lift," Mr Peters said.

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