The performance of Australia's services sector declined further in March, as both the retail and transport industries slackened for the fifth consecutive month.

According to the latest Australian Industry Group/Commonwealth Bank Australian Performance of Services Index, it underperformed by 2.2 percent at 46.5 in March.

Since November 2010, the said index has been below the 50-point level separating expansion from contraction.

Only three of the nine service sub-sectors reported an increase in activity in March - communications services, finance and insurance, and personal and recreation services.

Sales of services across the sector fell 6.2 points to 47.7 in the month and the new orders sub-index also contracted further.

Australian Industry Group chief executive Heather Ridout said consumers and businesses remained cautious despite the mining investment expansion.

"As well, trade exposed businesses in the services sector are feeling the competitiveness pinch of the persistently high (Australian) dollar," Mrs Ridout said in a statement accompanying the report today.

"The sector is clearly vulnerable to the risk of higher interest rates or federal budget measures that would further slow the recovery in private sector demand."

This is the lingering impact of the Australian dollar compounded by the interest rates and the other natural disasters have caused consumers to held back their spending in restaurants, cafes, and in retail buying, according to an interview with Commonwealth Bank senior economist John Peters said in the statement.

"The ongoing weak Australian PSI® is consistent with monthly ABS data on retail trade, and the RBA private sector credit numbers. A key factor behind ongoing weak consumer spending activity, despite very strong labour market conditions, is consumers' ongoing anxiety in the wake of the global financial crisis. Consumer concern is reflected in high savings as a share of disposable income of around 10%. As well, consumers are deleveraging and paring debt levels at a great rate of knots. Another retail sales leakage stems from the high Australian dollar. Anecdotal evidence suggests that consumers continue to move toward online shopping," Mr Peters said.

Australian PSI® Key Findings for March:

  • The services sector continued to contract in March according to the latest Australian Industry Group - Commonwealth Bank Australian Performance of Services Index (Australian PSI®) which dropped 2.2 points to 46.5 in the month (readings below 50 indicate a contraction in activity).
  • Solid declines in retail trade and transport & storage largely contributed to the weaker result.
  • Retail trade activity fell to 46.15 and transport & storage recorded 35.75.
  • Personal & recreational services, finance & insurance and communications services were the only sub-sectors to expand in March.
  • Sales of services fell back in the month (47.7) after a strong increase in February.
  • New orders continued to contract in the month (47.2).
  • Selling prices and input prices both rose in the month.