Australia's services sectors offering accommodation, cafes & restaurants, transport & storage, property & business and personal & recreational service have recorded gains in July, according to the latest services index survey from the Australia Industry Group in collaboration with the Commonwealth Bank.

Expanding activity in the accommodation, cafes & restaurants, transport & storage, property & business and personal & recreational service sub-sectors was not enough to offset the weakness in the remainder of the services sub-sectors in July, particularly retail and wholesale trade, the report said.

The overall level of activity in the services sector was broadly unchanged in July with the latest Australian Industry Group/Commonwealth Bank Australian Performance of Services Index (Australian PSI®) up 0.3 points to 48.8 to remain below the 50 point level separating expansion from contraction. The seasonally adjusted index has been in negative territory for ten of the past twelve months.

Australian Industry Group Chief Executive, Heather Ridout, said: "Services businesses continued to experience mixed, and in the majority, soft trading conditions. While some are expressing enthusiasm about the flow on benefits from the resources boom, generally, the positive effects of the boom are being outweighed by consumer caution, interest rate concerns, a very flat construction sector and uncertainty over the impacts of proposed climate policy measures."

She added that with this in mind, she noted that the RBA's decision on Tuesday to halt further increases in the cash rates will be received with relief by the majority in the Australian economy.

"With this in mind, yesterday's RBA decision was a no-brainer. It will be received with relief by the bulk of the Australian economy which is experiencing tough trading conditions," Mrs Ridout said in an emailed statement.

Commonwealth Bank Senior Economist, John Peters, said: "The July Australian PSI® revealing a small rise but still falling short of 50.0 further confirms other economic signals that a large chunk of the local economy continues to struggle for traction under the triple headwinds of a record high Australian dollar, past rate RBA hikes and a cautious and timid consumer saving madly and refusing to open the purse strings."

Mr Peters said consumer anxiety has translated into a sharp lift in savings as a share of disposable income moved up to 11.5 percent in early 2011.

He said the situation has been compounded by the series of "unsettling news from Europe and the US about their massive fiscal deficits and associated sovereign debt problems has further sapped both business and consumer confidence."

Positive Note

Mr Peters said that sales and new orders have appeared to be stabilising near 50.0 based on their latest data, with the employment and wages components in expansionary territory.

"Four of the nine services sub-sectors are still expanding. But, in wake of the high second quarter inflation figures, the consequent economic reality is that the RBA looks poised to lift official rates again soon. This will dampen consumer spirits and spending activity, despite likely resilient jobs growth and solid wages growth," Mr Peters said.

Australian PSI® Key Findings for July:

  • The Australian Industry Group/Commonwealth Bank Australian Performance of Services Index (Australian PSI®) was broadly unchanged in July, rising 0.3 points to 48.8 (readings below 50 indicate a contraction in activity).
  • The services sector has now spent ten of the past twelve months in the red.
  • Four of the nine services sub-sectors expanded in July - the same number as in the previous month.
  • Transport & storage, accommodation, cafes & restaurants, property & business services and personal & recreational services all expanded in July. Activity was weakest across the retail and wholesale trade sub-sectors.
  • The level of new orders has stabilised over the past couple of months - it was 49.3 in July.
  • Slowing in commercial construction and property sales were cited by some businesses as negatively impacting growth.
  • Western Australia and Queensland recorded the strongest services activity in July which may reflect the strong resources sector activity in those states.