‘Disturbing’: Activity levels across Australia’s services sector have tanked – Business Insider Australia

  • Activity levels across Australia’s services sector collapsed in January, deteriorating at the fastest pace in over four years.
  • Sales, employment and supplier deliveries fell sharply while margin pressures remained intense.
  • New orders also fell, hinting that activity levels are unlikely to improve in the near-term.
  • Activity across the retail sector deteriorated at the fastest pace in six years with sales, employment and new orders all declining.
  • The Ai Group described the January result as “disturbing” and a “clear warning-light for the rest of the economy”.

Activity levels across Australia’s services sector collapsed in January, deteriorating at the fastest pace in over four years.

The news was particularly bleak for retailers, the second-largest employer in Australia.

The Australian Industry Group’s (Ai Group) Performance of Services Index (PSI) tanked by 7.8 points to 44.3 last month in seasonally adjusted terms, leaving the index at the lowest level since October 2014.

The PSI measures changes in activity levels across Australia’s services sector from one month to the next. Anything above 50 signals activity levels are improving, while a reading below suggests they’re deteriorating. The distance away from 50 indicates how quickly activity levels are expanding or contracting.

So at 44.3, activity levels deteriorated sharply in January, recording the first contraction since early 2017. As seen in the chart below, that’s a very different backdrop to what was seen throughout much of 2018.

The January result points to a further loss of economic momentum following a steep deceleration in Australian GDP growth in the September quarter last year.

Innes Willox, CEO of the Ai Group, described the January result as “disturbing” with sales and employment falling heavily during the month.

“The services sector slumped sharply in January following a period of slowing activity over the second half of last year,” he said.

“The fall in services sector employment in January is disturbing and is a clear warning-light for the rest of the economy.”

Suggesting there’s unlikely to be an improvement in the near-term, new orders — regarded as a lead indicator on activity in the future — fell sharply during the month.

Supplier deliveries also fell heavily while inventories of finished goods rose, indicating a weakening in end-demand.

“Sales contracted or were stable in all but one services sector in January,” the Ai Group said.

“Respondents said the seasonal holiday shutdown had a larger impact on sales than in previous years, with the softening in demand that was apparent for many businesses in December carrying through into January.”

Adding to the downbeat picture for the sector, margin pressures remained intense with costs continuing to increase sharply while selling prices declined. That was despite a sizeable reduction in wage pressures during the month.

Mirroring results from prior months, the weakness last was concentrated in those firms who primarily service other businesses, rather than consumers.

“Among the business-oriented sectors, only business and property services expanded,” the Ai Group noted.

However, while in businesses that cater primarily for consumers fared better than those reliant on other businesses, the news was good for retailers with activity levels deteriorating at the fastest pace in over six years.

“January was the weakest monthly result for this sector since August 2012,” the Ai Group said. “All indicators for this sector were negative in January, with particularly weak results for sales and new orders.”

The Ai Group put the slump down to customers “continuing to direct their discretionary spending to services rather than purchasing retail goods”.

While that suggests broader household spending may have been firmer than the retail subindex implies, the January result will only intensify concerns of a housing-led slowdown in consumption in the months ahead.

Over a million Australians are employed in the sector and retail sales accounts for over 10% of Australian GDP. It’s big and important, hence why this result is so concerning. Markets will get an update on official retail spending later today when the ABS releases Australia’s December retail sales report.

Later this week, the Ai Group will release its separate Performance of Construction Index (PCI) for January, providing the latest report card on the health of the construction sector.

The PCI has been very weak in recent months with activity levels deteriorating sharply, led by steep falls in residential construction. If a similar result is repeated for January, it will mean that activity levels in the two largest business sectors in Australia tanked in early 2019.

For the broader Australian economy, such a result would be an unwelcome development.

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