A rebound in retail sales growth helped ease the pace of decline in the services sector in February. The latest Australian Industry Group/Commonwealth Bank Australian Performance of Services Index (Australian PSI) was up 3.2 points to 48.7, but still below the 50 point level separating expansion from contraction.

Health & community services; transport & storage; and accommodation, cafes & restaurants were the other subâ'sectors to expand in February. Across the services sector, the new orders sub-index continued to decline in the month although at a slower pace than in January.

Australian Industry Group Chief Executive, Heather Ridout, said: "The services sector remains subdued overall with only four of the nine sub-sectors expanding in February. The pickup in retail activity is welcome and hopefully will get further support in the months ahead from strong employment and wages growth.

"The performance of the services sector was weakest in Queensland in the wake of the January flooding and Cyclone Yasi. Business conditions in Queensland are expected to be adversely affected for several months before picking up pace on the back of heightened rebuilding activity and as more businesses resume normal operations," Mrs Ridout said.

Commonwealth Bank Senior Economist, John Peters, said: "Ongoing sluggish services sector activity in February is reflective of a slew of negative factors hitting the sector. These include rising interest rates, the tearaway AUD, which has been trading at post float highs above USD1.0, and the natural calamities afflicting the nation in early 2011, such as the widespread Queensland and Victorian floods and Cyclone Yasi. All these negative occurrences have further deflated already fragile consumer and business confidence and associated spending activity.

"Economic data such as the recent RBA private sector credit aggregates and ABS retail trade underscore the lacklustre mood of consumers and businesses still wary in wake of the GFC. The tendency of both households and business to save more and continue to deleverage (by paying down debt) is reflected in the credit data. Monthly business and personal credit growth were still mired in negative territory in January. And yesterday’s release of December quarter GDP showed households saving 9.7 per cent of their income. The GDP data also confirmed luke-warm household spending, which edged 0.4 per cent higher, to be up a tepid 2.8 per cent pa," Mr Peters said.