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Weaknesses in services persists amid global financial instability

08 October, 2008

The services sector activity contracted for a sixth successive month in September, although the rate of decline eased for the first time since May.

The Australian Industry Group – Commonwealth Bank Performance of Services Index (Australian PSI®) rose 5.6 points to 44.9, remaining below the key 50.0 level separating expansion from contraction.

Australian Industry Group (Ai Group) Chief Executive, Heather Ridout, said “The turmoil in global financial markets in recent weeks has contributed to weakness in consumer and business confidence in Australia and across the globe.

“Services sector activity declined across seven of the nine sectors in September, despite lower fuel prices and a reduction in the official interest rate.

“The September cut in the cash rate needs to be followed by a further reduction by the RBA in October.  The persistent spectre of global financial instability, as well as ongoing weakness in the Australian housing market, has ensured that individuals and companies remain cautious, leading to a sixth consecutive month of contraction in the Australian services activity measured by the Australian PSI®,” Ridout said.

Commonwealth Bank Senior Economist, John Peters, said the ongoing weakness in services sector activity helps illuminate why the RBA moved to cut rates in September, namely, the central bank’s concerns that the economy may be cooling too quickly.  The data also helps signpost further RBA easing in the near term.

“The broadly-based weakness now evident in the services sector is weighing on the economy more generally.  Lower interest rates and lower petrol prices will help cushion the slowdown, as will the recently lower Australian dollar.  But a period of sluggish growth and some upward pressure on the unemployment rate looks to be well and truly in the economic frame.  The ongoing slowdown is likely to help dampen local price pressures in the period ahead,” Peters said.

Australian PSI® Key Findings for September:

- Firms pointed to instability in global financial markets and Australia’s soft building sector as factors restricting services activity.
- Services sector activity contracted for a sixth successive month, although the rate of decline eased, rising by 5.6 points to 44.9.
- Activity grew in personal & recreational services, and in transport and storage but continued to fall in the seven other service sectors.

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