The Australian services industry continues to deteriorate amid consumer concern over spending cuts announced in the federal budget.
The industry has now contracted for four consecutive months, the Australian Industry Group says.
Ai Group’s Performance of Services Index (PSI) fell 2.3 points in June to 47.6 points, below the 50-point level separating expansion from contraction.
It appeared likely to be at least several months before momentum would rebuild in the sector, said Ai Group chief executive Innes Willox.
“Conditions in the services sector slipped again in June with respondents to the latest Australian PSI survey suggesting that ongoing weakness across much of the domestic economy and the public reception of the federal budget are dampening consumer and business confidence,” Willox said.
Survey respondents said recent deterioration in manufacturing conditions was reducing demand for business-to-business services like accounting, IT and personnel services, Willox said.
Just three of nine sub-sectors experienced growth in June, including health and community services and finance and insurance.
Hospitality also expanded, for the first time since April last year, possibly due to the warmer weather this autumn.
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But retail trade and wholesale trade continued to contract, pointing to further weakness in household spending, Willox said.
“Feedback from participants in both the retail and wholesale trade sub-sectors suggests that discretionary spending remains weak in June with proposed federal budget changes to welfare, family payments and public sector employment continuing to weigh on consumer confidence,” the survey said.
“Unseasonably warm weather in autumn has also depressed sales of winter clothing and appliances in many parts of the country.”
Services employment also contracted for a fourth month in June, although it did improve slightly.
Other data released today shows Australian retail spending has fallen for the second month in a row.
Retail trade was down 0.5 per cent in May, following a 0.1 per cent fall in April, the Australian Bureau of Statistics said on Thursday.
CommSec economist Savanth Sebastian said fears over May’s federal budget, as well as unseasonably warm weather, were to blame.
“There’s been a trend of a slowing growth story when it comes to retail activity over the last four or five months and you can really sum it up in a couple of words: federal budget and consumer confidence,” Mr Sebastian said.
“Those are the two big drivers of the weakness.
“The warmer weather is having an impact on clothing sales.
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“Non-food retailing was down almost one per cent which suggests the consumer has really crept back into its shell.”
Mr Sebastian said a big turnaround in consumer confidence is needed for retail spending to recover.
“I think confidence will bounce back, but certainly not in the next few months. It’s going to take some time yet,” he said.
“The higher Australian dollar will also start to see some money coming out of stores and going online.”
On a more positive note, home building approvals have posted their strongest monthly gain in eight months, a sign the housing sector will be the main driver for the economy when mining investment fades.
Approvals for the construction of new homes rose 9.9 per cent across Australia in May, official figures show, better than the 3.2 per cent rise economists had been expecting.
Over the 12 months to May, building approvals were up 14.3 per cent.
CommSec economist Savanth Sebastian said the housing sector will be the main highlight for the Australian economy over the next 12 months.
“There’s signs of consolidation but it’s still strong in terms of new construction activity and that’s the key,” he said.
“You’ve got building approvals which are solid, new home sales easing off four-year highs but certainly the fact that construction loans remain relatively upbeat is a good sign.”
He said the boost in housing construction will increase supply and keep housing prices from rising too fast.
“All this seems to point to rates on hold and even the potential that the RBA could deem another rate cut necessary if this trend continues.”
Approvals for private sector houses rose 0.5 per cent in the month, and the ‘other dwellings’ category, which includes apartment blocks and townhouses, was up 27.2 per cent.
