Data gathered from the Commonwealth Bank Performance Services Index (Australian PSI) shows that the local services sector continued its downward performance in December and was relatively flat during the month, up 0.2 points to 46.4 (readings below 50 indicate a contraction in activity). The index was released by the Australian Industry Group.

December's poor result is 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.

Australian Industry Group Chief Executive, Heather Ridout, said: "The weak conditions in the services sector in December capped off a year in which the Australian PSI® 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 Australian PSI® outcome 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.

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

Key Findings for December:

* The Australian Industry Group/Commonwealth Bank Performance of Services Index (Australian PSI®) was relatively unchanged in December lifting just 0.2 points to 46.4 (readings below 50 indicate a contraction in activity).

* New orders remained below 50 for the tenth time this year at 45.3 in the month.

* The strong Australian dollar and rising interest rates were largely behind the poor performance in the professional services sub-sectors including property & business services and finance & insurance.

* Wholesale trade was the strongest performing sub-sector in December at 72 points.

* Employment in services fell for the fifth consecutive month.

* On a three monthly moving average, the Australian PSI® remained broadly unchanged for the second half of 2010.