Ongoing soft demand in the services sector has led to a third consecutive monthly decline in activity, according to the latest Australian Industry Group/Commonwealth Bank Performance of Services Index (Australian PSI). 

The seasonally adjusted index was essentially stable at 48.4 in March, shifting up by just 0.1 points from the previous month and still below the critical 50.0 level separating expansion from contraction.

Businesses experienced further falls in sales, new orders and deliveries in the month.  Declines in consumer-based sectors in particular accommodation, cafes & restaurants and retail trade, offset gains in the key business-related sectors of property & business services, communications services and transport & storage.

Australian Industry Group Chief Executive, Heather Ridout, said: "The March Australian PSI highlights the patchy nature of the recovery. 

The sluggish performance of the consumer-related sub-sectors illustrates a degree of caution on the part of households, strongly influenced by interest rate increases and the anticipation of further rises.

"There is some encouraging news with the rebound in property and business services activity, reflecting recent strength in the housing market. Activity has also improved in other business related sub-sectors. However, overall the March result continues a disappointing opening quarter to the year in the important services sector. It reinforces our view that the recovery is yet to gain full traction across the economy," Mrs Ridout said.

Commonwealth Bank Senior Economist, John Peters, said: "Five RBA rate hikes since October 2009, combined with the fade-out of the Government's short term fiscal stimulus targeted at consumers has had some negative impact on consumer related services sector activity in early 2010.  On a more positive note business related services appear to have fared better with a rebounding housing sector and ongoing Federal and State Government infrastructure spending boosting activity in these areas.

"The still soft (below 50 reading) in the Australian PSI headline index (48.4) and employment component (48.9) in March underlines the subdued momentum in services' activity.  However, ABS data showing strong jobs growth in the broad economy in recent months, and signalling that unemployment has peaked and is now headed lower, augurs well for future growth in consumer demand for services, despite likely further RBA rate hikes," Mr Peters said.