Services sector hit amid weakening consumer confidence


Weakening consumer confidence saw the services sector fall in May, according to the latest Performance of Services Index

June 3, 2010

Weakening consumer confidence saw the services sector fall in May, according to the latest Australian Industry Group/Commonwealth Bank Performance of Services Index.

The Index fell 4.8 points to 47.5 (below the 50.0 point level separating expansion from contraction) in seasonally adjusted terms.

Continuing consumer uncertainty was reflected in the softness of the retail and accommodation, cafes & restaurants sub-sectors.

The transport & storage; communication services; health & community services; and property & business services sub-sectors all contracted in May, while the finance & insurance and personal & recreational services sub-sectors rose modestly in the month.

Ai Group Chief Executive Heather Ridout says the result marks the continuation of a fairly ordinary performance by the sector this year.

"While the RBA's decision this week to leave the cash rate unchanged is welcome, services activity has been weighed down by the string of earlier interest rate rises, which have dented both consumer confidence and business demand at a time of renewed volatility in global markets," Ridout says.

She says the disappointing trend points to a commercial environment falling short of activity levels which could put the sector on a solid growth path.

"Sentiment remains uneasy and growth patchy in consumer-related sectors, while the weakness in new orders suggests continuing softness in activity in the near term."

KEY FINDINGS

Key findings from the lastest Australian PSI reveal sales of services declined for the first time in three months, with the seasonally adjusted sub-index dropping 10.5 points to 43.5.

New orders also declined in May, with the seasonally adjusted sub-index falling 4.8 points to 47.9

Services sector employment contracted following growth in April, with the seasonally adjusted sub-index decreasing by 4.0 points to 48.3.

INFLUENCING FACTORS

Commonwealth Bank Senior Economist, John Peters, says rising mortgage interest rates and petrol prices together with withdrawal symptoms from the government’s short term fiscal initiatives last year are weighing on consumer sentiment.

"On a more positive note, a number of key drivers of retail spending for 2010 are further materialising and should boost retail activity in late 2010 and into 2011," Peters says.

"These drivers include: sharply improving labour market conditions, including substantial jobs growth and further likely falls in the unemployment rate; likely higher house and share prices, and further rising wages and incomes in 2010 and 2011," he adds.



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