Weakening sales and new orders saw the services sector soften in October, according to the latest Australian Industry Group/Commonwealth Bank Australian Performance of Services Index (Australian PSI).
The latest seasonally adjusted index dropped 1.5 points to 48.8 in October to be below the 50 point level separating expansion from contraction.
While the professional business services sub-sectors, including finance and insurance (61.0) and property and business services (52.0), were strong in October, subdued consumer confidence saw sub-sectors linked to household spending drop into negative territory.
Australian Industry Group Chief Executive, Heather Ridout, said: "The softness in services sector activity in October alongside the continuing weakness in manufacturing, as recorded in the recent Australian PMI strongly reinforces the Reserve Bank’s decision to reduce interest rates. While there are some signs that business spending may be gradually recovering, consumers clearly remain tentative and flat conditions persist across much of the economy," Ms Ridout said.
Commonwealth Bank Senior Economist, John Peters, said: "The latest Australian PSI result reflects the patchy nature of growth in the local economy which is labouring under the impact of the robust Australian dollar which has continued to trade comfortably above parity with the US dollar in recent weeks. “As well, consumer and business confidence continues to be sapped by the sovereign debt turmoil in Euroland. In particular, consumers remain very cautious about the future. They are saving ferociously and are very shy about spending, particularly in the areas of discretionary retail products and services. “This dynamic was underlined by the October Australian PSI, with sub-sectors linked to household spending (like accommodation, cafés and restaurants and retail trade) posting very lacklustre performances.”
Mr Peters says the latest 0.25 per cent rate cut should help boost household and business confidence.