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Services sector continues to suffer

The services sector continues to contract, with a fall in new orders and decreasing selling prices keeping the services sector in negative territory in the June Performance of Services Index.

Services Sector continues to sufferThe Australian Industry Group/Commonwealth Bank Australian Performance of Services Index, remained below the 50 point mid-point separating expansion from contraction, indicating the industry continues to contract in 2010. In June however, the rate of contraction eased slightly, with the Australian PSI at 48.8 up 1.3 points.

Retail trade suffered the most, with June the eighth month of contraction for the subsector. Employment across the services industry was up, despite the contraction in business overall. Tasmania was the only state to record an expansion in services in June.

Australian Industry Group Chief Executive, Heather Ridout, attributed the poor result of the Australian PSI to successive interest rate increases from the RBA hitting services hard in Australia’s ‘two speed economy”.

“The performance of the sector reinforces concerns that despite some predictions to the contrary, very important segments of the economy are stuck in the slow lane. The disappointing fall in new orders suggests there is little prospect of acceleration over the next few months. Given this environment and the growing global uncertainty, we would expect that interest rates will remain on hold,” Mrs Ridout said.

Commonwealth Bank Senior Economist, John Peters, mirrored Heather Ridout’s sentiment, pinning the weakness seen in the services sector to the winding back of Federal Stimulus spending and successive interest rate increases from the RBA.

“However, the fundamentals underpinning household spending remain strongly positive. The labour market is in robust health producing a rich crop of jobs, and hours worked continues to climb, boosting household incomes. Although house and equity prices have eased in recent months, large increases have been posted in both categories since the start of 2009, enhancing overall household wealth. Looking ahead as labour market conditions tighten further, and consumers realise local economic growth is strengthening not faltering, household spending (including retail sales) is likely to lift,” Mr Peters said.