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Australian services sector on verge of collapse

Australia’s services sector continues to contract as the Federal Government’s fiscal stimulus dries up and the Reserve Bank’s interest rate increases impact the services sector.

Australian Performance of Services IndexThe latest Australian Industry Group/Commonwealth Bank Australian Performance of Services Index (Australian PSI) fell an additional 2.2 points on June’s result of 48.8 to 46.6 in July (below the 50 point level separating expansion from contraction) triggering concerns that the Australian services sector is at the tipping point of severe contraction.

The Australian PSI for June echoed the poor performance of Australian retailers, who recorded only a 0.2 percent increase in retail trade spending during June in figures released today by the Australian Bureau of Statistics.

Australian Industry Group Chief Executive, Heather Ridout, believes yesterdays decision by the Reserve Bank of Australia to leave rates unchanged at 4.5 percent was the right one for Australia’s services sector, with the sector on the verge of aggressive contraction if interest rates were to increase further in the short term.

“Both consumer-related services and business services fared poorly in July reinforcing the picture of a gradual and uneven recovery. Caution from consumers and businesses is preventing a more convincing and widespread recovery from taking hold.

“With private sector demand yet to assert itself as a sustaining feature of the recovery, the Reserve Bank’s decision yesterday not to raise interest rates was clearly the right call and the RBA should take a wait and see approach for some time yet,” Mrs Ridout said.

Commonwealth Bank Senior Economist John Peters believes Australians are opting to pay down their personal debt levels due to increases in interest rates earlier this year, with the reduced spending impacting negatively on Australian businesses.

“Local consumers remain wary in face of the six RBA rate hikes since October 2009, and are devoting financial resources to balance sheet repair. This factor, together with the expiration of the Federal Government consumer targeted fiscal stimulus packages, has ensured consumer spending has been lacklustre so far this year. This consumer torpor is reflected in weak activity in sectors such as retail trade, and accommodation, cafes & restaurants”

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David Olsen

David Olsen

An undercover economist and a not so undercover geek. Politics, business and psychology nerd and anti-bandwagon jumper. Can be found on Twitter: <a href="http://www.twitter.com/DDsD">David Olsen - DDsD</a>

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