The services sector continued to contract in May, albeit at a slower pace, according to the latest Australian Industry Group/Commonwealth Bank Australian Performance of Services Index (Australian PSI) which lifted 3.9 points to 43.5 in the month (readings below 50 represent a contraction in activity with the distance from 50 indicative of the strength of the decrease).

 

Reports of weak trading were widespread in May with no state recording an expansion in services activity. The only sub-sector to expand was personal & recreational services.

 

Australian Industry Group Chief Executive, Innes Willox, said: "The widespread difficulties across the services sector continued in May. Global uncertainties have further shaken business and household confidence and this is reflected in slower sales and falling employment. There is little sign to date of any respite flowing from the reduction in interest rates or from the easing in the level of the dollar over recent weeks. The weakness in new orders is of particular concern suggesting that the difficulties facing services businesses are set to continue over coming months, adding further weight to calls for another interest rate cut," Mr Willox said.

 

Commonwealth Bank Senior Economist, John Peters said: "The latest soft Australian PSI result reinforces just why the RBA felt compelled to cut rates by a surprisingly aggressive 0.5 of a per cent in May to try to boost low household and business confidence. Indeed, the multi-speed growth pattern across sectors and regions in the national economy is weighing heavily on the mood of business and consumers.

 

"The mining and related sectors continue to post strong activity while large segments in the non-mining economy remain under pressure from the high Australian dollar and born again savers and 'deleveragers' in the household sector. This is cogently underlined in the May Australian PSI with only one of the nine sub sectors posting readings above 50. It is this ongoing dismal outlook in many non-mining sectors that we believe will help push the RBA over the line to ease rates by another 0.25 of a per cent to 3½% at the June Board meeting later today," Mr Peters said.

 

Australian PSI Key Findings for May:

  • The Australian Industry Group/Commonwealth Bank Australian Performance of Services Index (Australian PSI) continued to contract in May although at a slower pace with a lift of 3.9 points to 43.5 (readings below 50 represent a contraction in activity with the distance from 50 indicative of the strength of the decrease).
  • Personal & recreational services was the only sub-sector to record an expansion in activity in May (57.51).
  • Finance & insurance activity improved (49.91) but continued to contract. The sub-sector did record expansions in sales and deliveries.
  • Sub-sectors closely related to household spending - including retail trade, wholesale trade and accommodation, cafes & restaurants - remained in the red in May.
  • In line with the widespread and ongoing weak trading conditions, the Australian PSI® average selling prices index is now at its lowest level since the selling prices index series began in 2007.
  • The new orders sub-index increased in May to 40.4 - remaining in negative territory.
  • Employment continued to contract in services in May - dropping 2.6 points to 44.0.

Download the full May 2012 Australian PSI®.