Australian PSI®: Volatility Continues in Services Sector

The spike in services sector activity was not sustained in July with activity falling back after nudging the growth line in June according to the latest Australian Industry Group - Commonwealth Bank Performance of Services Index (Australian PSI®). However, while the seasonally adjusted Australian PSI® fell by 6.1 points to 44.1 in July, the trend suggests the sector has performed better over recent months with the pace of contraction easing. (The 50.0 point level separates expansion from contraction.)

The Australian PSI® found that consumer spending on some of the more discretionary types of services, including retail goods and accommodation, cafés and restaurants, was pulled back in the month, while businesses relied on existing stocks to meet demand, rather than adding extra capacity.

Australian Industry Group (Ai Group) Chief Executive, Heather Ridout, said: “The Australian PSI® outcome for July demonstrates that business conditions remain volatile and problematic.

“While the trend suggests the pace of contraction in the sector appears to be easing there were signs of the fragility of consumer and business confidence. The result underlines the fact that the path to recovery is not going to be smooth, it will be a long, hard slog,” Mrs Ridout said.

Commonwealth Bank Senior Economist, John Peters, said: “While the Australian PSI® eased back into contractionary territory in July, the underlying trend points to slowly improving conditions in the services sector in recent months.

“However, the trend improvement in the Australian PSI® in recent months does line up with a slew of relatively positive economic data which have been released in recent months, which signal that Australia’s economic downturn is not likely to be as brutal and crippling as those in the G7 economies and many fellow G20 economies,” Mr Peters said.

“We think a modest local economic upturn is likely in 2009/10. This rebound will be driven by sharply lower cash and mortgage rates and the various Federal Government stimulus packages, which will boost domestic demand and activity, particularly in the retail, wholesale trade and property sectors,” Mr Peters noted.

Australian PSI® Key Findings for July:

• The seasonally adjusted Australian Industry Group/Commonwealth Bank Performance of Services Index (Australian PSI®) fell by 6.1 points to 44.1, falling below the 50.0 level separating expansion from contraction.
• Sales and new orders contracted following one month of growth, while employment fell for a 14th consecutive month.
• Stocks were rundown at near record pace, offsetting a solid rise in the sub-index in the previous month, suggesting firms are uncertain as to whether the improvement in demand will be sustained.
• Firms cited benefits from the rollout of Government fiscal stimulus measures and improvements in the automotive and food sectors, although end of financial year uncertainty and the conclusion of cash payments to taxpayers appear to have weakened demand.
• Activity fell in all states, excluding Queensland, compared with three states in June.

Download the full July 2009 Australian PSI®.


Further Comment:
Heather Ridout, Ai Group: (02) 9466 5504
John Peters, Commonwealth Bank of Australia: (02) 9117 0112

Media Inquiries:
Tony Melville, Ai Group: (02) 6233 0700
Steve Batten, Commonwealth Bank of Australia: (02) 9378 2504


Background:
The Australian Industry Group - Commonwealth Bank Australian Performance of Services Index (Australian PSI®) is a leading indicator of services activity in the Australian economy. The Australian PSI® is a seasonally adjusted national composite index based on the diffusion indices for sales, orders/new business, deliveries, inventories and employment with varying weights. An Australian PSI® reading above 50 points indicates that services activity is generally expanding; below 50, that it is declining. The distance from 50 is indicative of the strength of the expansion or decline. Results are based on a sample of around 200 companies.