Australia's services sector continued to underperform in December largely due to falls across the professional services sub-sectors including property & business services and finance & insurance, all of which were affected by the ongoing interest rate rises and strong exchange rates.

The latest Australian Industry Group/Commonwealth Bank Performance of Services Index remained relatively unchanged, up just 0.2 points to 46.4. Readings below 50 indicate a contraction in activity.

Australian Industry Group chief executive Heather Ridout, said the weak conditions in the services sector in December capped off a year in which the data was only in positive territory for two months.

"With new orders also down in December, the prospects for a more positive start to 2011 do not look encouraging."

"The soft conditions in December were particularly noticeable in the business-related services sub-sectors. This suggests that businesses are hesitating to spend in the face of fading expectations of a pick-up in sales.

"Conditions certainly remain tough in the services sector with the Melbourne Cup day rise in official interest rates clearly evident at cash registers during December," Mrs Ridout said.

Commonwealth Bank senior economist John Peters said the December data showing services sector activity still stuck in contractionary territory is 'disheartening.'

"But these latest Australian PSI readings are consistent with other economic data such as retail sales which remain lacklustre in an environment of cautious consumers bracing for ongoing interest rate rises.

"Many companies are also being weighed down by the robust Australian dollar which continues to hover near parity with the US dollar."

Mr Peters said other recent data has shown that nervous consumers are increasingly salting their cash away for a rainy day and paying down debt in anticipation of more RBA rate hikes over the next year.

"Indeed, the early December release of third quarter GDP data revealed the household savings ratio surging to 10.2 per cent.

"A continuing pickup in local growth, an associated further firming in jobs markets and an unemployment rate dipping under 5 per cent, together with solidly rising incomes and wages, are likely to entice consumers to spend more in 2011," Mr Peters said.