Consumer caution underlines fragile economy
Business sentiment and consumer caution remain very downbeat, latest figures show.
Spending activity in the services sector continues to contract, reflecting a fragile broader economy, analysts said.
The latest Australian Performance of Services Index was only marginally higher at 41.5 in June (readings below 50 represent a contraction in activity with the distance from 50 indicative of the strength of the decrease).
Across the services sector, profits are continuing to contract with selling prices (45.3) and sales (37.7) down while input prices continue to rise (61.8).
Australian Industry Group Chief Executive Innes Willox said the economic signals are poor.
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“The continuing weakness across the services sector points to the fragility of the broader economy as it struggles in the face of weak demand; the slowing of the mining boom; and flat conditions in construction and manufacturing,” Willox said.
“While lower interest rates are now set to stimulate activity, this is taking time to flow through to household and business spending both of which are being held back by a lack of confidence and by political and policy uncertainty. With the jobs market continuing to flatline, a convincing turnaround appears to be some time off.”
Commonwealth Bank Senior Economist John Peters said the figures reflect the impact of a drop off in mining activity.
“Ongoing torpor in the services sector encapsulates the challenges facing policymakers as the mining investment peaks and tapers off with the need for non-mining sectors of the economy like services to take up the slack,” Peters said.
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“But these non-mining sectors are battling ongoing strong negative headwinds from substantial fiscal tightening at the Federal and State levels, as well as the historically high – albeit recently softening – Australian dollar.
“Ongoing insipid sales and new orders components of the Australian PSI reflects the fact that both business and consumer sentiment remains very downbeat.
“Ongoing fragility of sentiment in households and businesses and weakness in many non-mining sectors of the economy are key reasons why we think the RBA will move again to cut the official cash rate by another 0.25 per cent to 2½ per cent.
“This is most likely to occur in August after a likely very tame second quarter CPI, to be released on 24 July.
“This further rate cut, plus other recent cuts working their way through the economy, together with the 13 per cent slide in the Australian dollar since mid- April, should give a boost to activity and confidence in late 2013.”
The Australian PSI report was further underlined today with official ABS figures showing Australian retail spending rose 0.1 per cent in May.
Total retail spending was $21.825 billion in May, up from $21.795 billion in April, the Australian Bureau of Statistics said.
Economists had been forecasting a rise of 0.4 per cent for May.
