Growth of Australia's services sector has remained subdued in December with business services posting headwinds ahead of the consumer-related services offered by local firms in December, according to the latest survery conducted by the country's Australian Industry Group and the Commonwealth Bank.

With household discretionary spending remaining soft, the services sector was in negative territory in December according to the latest Australian Industry Group/Commonwealth Bank Australian Performance of Services Index (Australian PSI®). Although the seasonally adjusted index was 1.3 points higher in December at 49.0, it remained below the 50 point level, indicating a contraction in activity.

Professional business service sub-sectors appear to have stabilised over recent months with activity expanding in December in finance & insurance and property & business services. New orders across services were steady at 50.4.

Australian Industry Group Director Public Policy, Peter Burn said: "The lack of momentum in the services sector, as indicated by December's Australian PSI®, underlines the flat conditions facing much of the economy. The somewhat stronger performance of business services sub-sectors contrasts with the ongoing weakness across most of the consumer-related sub-sectors. This points to continued wariness on the part of households, some of which reflects the lack of progress in resolving the European sovereign debt issues, together with softness in domestic house prices," Dr Burn said.

Commonwealth Bank Senior Economist, John Peters, said: "The latest Australian PSI® result reflects the multi-speed growth pattern across sectors and regions in the national economy which is being buffeted by substantial negative headwinds. These headwinds include the Euroland sovereign debt crisis and consequent negative impact on local business and consumer confidence, and the robust Australian dollar which is punishing all export industries outside mining and import competing industries like tourism and education.

"The bad news is that this pattern of growth is likely to persist in 2012. The Australian dollar is unlikely to substantially depreciate due to the ongoing high terms of trade, and there is no end in sight to Euroland's chronic financial woes. On a brighter note, the RBA's policy easing moves in both November and December, which has seen the official rate cut by a total of 0.5% to 4.25%, should provide some boost to household and business confidence and to struggling segments of the economy including the services sector. We see the RBA moving quickly again on this front in the New Year and cutting rates another 0.25% in February (the first RBA meeting in 2012). Any such move should help boost confidence and activity over 2012," Mr Peters said.

Australian PSI® Key Findings for December:

  • The Australian Industry Group/Commonwealth Bank Australian Performance of Services Index (Australian PSI®) was 1.3 points higher at 49.0 in December (readings below 50 indicate a contraction in activity).
  • Household discretionary spending remains weak with retail trade and accommodation, cafes & restaurants soft in the month. Price discounting remained prominent in the retail sector during this period.
  • Three of the nine sub-sectors expanded in the month - down from four the previous month.
  • Property & business services and finance & insurance were the strongest performing sub-sectors in December.
  • The new orders sub-index was steady at 50.4 in December.
  • The employment sub-index increased by 1.9 points to 48.1 in the month.
  • Wages were 60.4 and input prices were also stronger (66.9).