Business, consumer caution behind services decline

Solid declines in the retail trade and transport & storage sub-sectors behind drop in the services sector last month

April 5, 2011

Solid declines in the retail trade and transport & storage sub-sectors were largely behind a drop in the services sector last month, according to new data out today.

The latest Australian Industry GroupCommonwealth Bank Australian Performance of Services Index dropped 2.2 points to 46.5 in March.

Sales of services across the sector took a hit dropping 6.2 points to 47.7, while the new orders sub-index also contracted further over the month.

Retail trade activity fell to 46.15 while transport & storage dipped to 35.65.

Personal & recreational services, finance & insurance and communications services were the only sub-sectors to expand in March.

Australian Industry Group Chief Executive Heather Ridout says despite the "very strong" outlook for in the minerals sector, consumers and businesses remain highly cautious.

"As well, trade exposed businesses in the services sector are feeling the competitiveness pinch of the persistently high dollar," Ridout says.

She says the important new orders sub-index slipped lower in March and new orders have now fallen for five consecutive months.

"Service providers are not confident of the immediate outlook and employment in the sector as a whole continues to be weak.

"The sector is clearly vulnerable to the risk of higher interest rates or Federal Budget measures that would further slow the recovery in private sector demand."

Commonwealth Bank Senior Economist John Peters says the ongoing sluggish activity in the retail trade, accommodation, cafes and restaurants, and wholesale trade sectors is disappointing but not surprising given the impact of recent economic factors.

"These negative factors include an Australian dollar still posting fresh post-float highs, rising interest rates over the past year, the natural disasters that hit Queensland, Victoria, and Western Australia, and the Japanese and New Zealand earthquake tragedies over the summer months," Peters says.

He says the ongoing weak Australian PSI is consistent with monthly ABS data on retail trade, and the RBA private sector credit numbers.

"A key factor behind ongoing weak consumer spending activity, despite very strong labour market conditions, is consumers’ ongoing anxiety in the wake of the global financial crisis."

Another retail sales leakage, according to Peters, stems from the high Australian dollar.

"Anecdotal evidence suggests that consumers continue to move toward online shopping," he says.

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