Australia's services sector showed poor signs of improvement, according to the latest Australian Industry Group/Commonwealth Bank Australian Performance of Services Index (Australian PSI®), the seasonally adjusted index fell 1.6 points to 49.9 after a strong lift the previous month (readings below 50 indicate a contraction in activity).

The data presented showed that there is a solid increase in sales (up 5.0 points to 53.2) in the month was not enough to offset drops in employment (48.4) and stock levels (47.6).

While many businesses reported the mining sector was boosting sales and employment, other, more directly trade-exposed sub-sectors cited the strong exchange rate as a barrier to expansion. Caution on the part of households was also recorded as a factor hindering growth in a number of sub-sectors.

Australian Industry Group Chief Executive, Heather Ridout, said:"The Australian PSI® confirms the economy remains lopsided with the combination of the exchange rate and caution on the part of households, preventing a more widespread recovery taking hold. The sub-sectors exposed to household spending such as accommodation, cafes & restaurants were more likely to report flat or contracting activity during the month,"

She pointed out that the the service sub-sectors which are interest rate sensitive, are struggling to gain momentum in a broader environment of soft growth.

Ms Ridout said that this development should prompt the RBA to consider its options of holding back further rate increases.

"While consumers remain cautious, there were positive signs of improving business confidence with lifts in activity in the professional service sub-sectors including the finance & insurance, communication services and property & business service sub-sectors," Mrs Ridout said.

Commonwealth Bank Senior Economist, John Peters, said: "The latest Australian PSI® result below 50.0 confirms the divergent patterns of growth being experienced across the economy as portrayed in the first quarter GDP released yesterday. The effect of the high Australian dollar is negatively impacting areas like tourism, restaurants, cafes and accommodation. Moreover, the rate hikes in 2010 and media talk of more RBA rate hikes later in 2011 has certainly taken its toll on consumer confidence, spending and interest rate sensitive business sectors.

"Unfortunately, these negative headwinds to overall services sector activity look to remain in place over 2011, with the Australian dollar set to stay at current stellar heights due to the record terms of trade, and with the RBA signalling that more interest rate rises are likely sooner rather than later. Another key factor weighing on services activity is current consumer caution and parsimony despite strong jobs and wages growth. This consumer concern is being reflected by lifting savings as a share of disposable income to around 11.5% in the first quarter. Looking ahead, on a more positive note, as the unemployment rate tracks lower towards 4.5% or below, consumer jitters may ease a little and consumers may spend a little more," Mr Peters said.

Australian PSI® Key Findings for May:

  • The Australian Industry Group/Commonwealth Bank Australian Performance of Services Index (Australian PSI®) fell 1.6 points to 49.9 (readings below 50 indicate a contraction in activity).
  • Respondents cited the multi-speed economy as affecting growth in May.The boost from the mining industry was offset by the high Australian dollar and cautious households.
  • Four of the nine services sub-sectors expanded in May - communication services was the only sub-sector to record a significant increase in activity.
  • Sub-sectors related to household spending (including accommodation, cafes & restaurants) mostly contracted in May.
  • The sales sub-index rose 5.0 points to 53.2.
  • New orders were broadly unchanged in May at 49.4.
  • After a strong increase in April, the employment sub-index fell 9.4 points to 48.4.
  • Stock levels have now fallen eleven out of the past twelve months