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Services Sector in Longest Growth Spurt Since GFC

Posted: October 8th, 2015 | Author: | Filed under: Business News | Tags: , , , , , | Comments Off on Services Sector in Longest Growth Spurt Since GFC

Service Sector Rises SeptemberAustralia’s services sector expanded for a fourth straight month in September, marking the longest period of continuous growth since the 2008 global financial crisis.

The Performance Of Services Index by the Australian Industry Group stood at 52.3 last month. This was above the critical 50-point level, separating expansion from contraction.

However, the index eased by 3.4 points for the month, meaning that while the pace of growth slowed in September, the industry remained in expansion overall. The last time the index recorded a four-month stretch of growth was in March 2008.

At the same time, a leading private sector measure of inflation saw consumer prices gain momentum last month, sending the annual rate of inflation to its highest level in 12 months. The TD Securities Melbourne Institute Inflation Gauge rose by 0.3 percent in September, after a 0.1 percent rise in August.

In the 12 months to September, the Inflation Gauge increased by 1.9 percent, the highest annual rate since November 2014. However, that was still below the Reserve Bank’s target range for inflation of 2 to 3 percent.

Within the month, there was a 6.3 percent jump in tobacco prices because of an excise increase, a 4.5 percent rise in the cost of holiday travel and accommodation, and a 1.2 percent increase in fruit and vegetable prices. By contrast, petrol prices fell 5 percent, the cost of newspapers, books and stationery slipped 4.2 percent and clothing prices edged 0.7 percent lower.

Sector by sector, side-by-side the indices remain relatively flat, Services dropped 3.4 points to 52.3, Construction eased 1.9 points to 51.9 while Manufacturing inched forward, gaining 0.4 points to settle on 52.1 points  ::::

Australian Industry Group chief executive Innes Willox said the result was welcome news.

Retail Remains Flat“This broadening of the sources of domestic growth is an encouraging sign of an economy responding favourably to the stimulus of low interest rates and the further fall in the Australian dollar,” Mr Willox said. “Local tourism, retail and other consumer services are noticing the benefits of the lower dollar offsetting the higher currency prices of imported inputs.”

New orders eased 5.1 points in the month to 51.8, services sales slowed by 6.9 points to 58.5 and stock levels rose 5.9 points to 50.

But employment contracted mildly, falling 3.6 points to 48.9, after two months of expansion.

Of the sub-sectors, finance and insurance grew for a ninth consecutive month, property and business services expanded for a third month, while health and community services and hospitality continued August’s return to growth.

Transport and storage stabilised for the first time since July 2012, but activity in personal and recreational services and communications continued to shrink.

Mr Willox said it was also possible the Liberal leadership change, which saw Tony Abbott replaced by Malcolm Turnbull as Prime Minister, had an impact on sentiment.

“Still buoyant housing market activity is clearly a factor in the growth of some sub-sectors and there is early evidence that the changes in the political environment may have supported consumer confidence and sales,” Mr Willox said.

Inflation Picked up Steam for September

TD Securities’ chief Asia-Pacific macro strategist, Annette Beacher, said the weaker Australian dollar was making imported goods more expensive.

“We are seeing price pressures being passed on from the lower Australian dollar, but of comfort, we have seen domestic inflation moderate,” Ms Beacher said. “So at the moment, it does tell you that yes, the weaker Australian dollar is boosting imported prices, but given that we have very, very benign domestic inflation, that will be of comfort to the RBA.”

Ms Beacher also said the September quarter had seen strong momentum in consumer prices after several months of stagnation, she said data from the Inflation Gauge indicated there would likely be quite a jump in the official Consumer Price Index figures, due for release by the Australian Bureau of Statistics at the end of this month.

“We have a rise of 0.8 per cent for the quarter, and that means annual inflation of 1.8 per cent,” Ms Beacher said. “Now that’s not very high, obviously, but the overall message from the September report is that the very, very weak inflation is behind us and we’re starting to see a turnaround.”

Despite that, Ms Beacher said the Reserve Bank was unlikely to be too worried about the rebound in consumer prices and the subsequent pressure that could put on inflation.

She said inflation was not expected to get much air time when the Reserve Bank board meets for its monthly policy setting discussion tomorrow.

“They’ll probably just say inflation remains within target, and probably have more of a discussion about what the US is up to with interest rates, how’s the China slow,” Ms Beacher said.

Sector Expands on Back of Finance, Health and Retail

Over the past 6 months the services sector has expanded – albeit slightly – due to good performances from financial services, health and retail.

Finance and insurance services have been the dominant force driving growth, Health and community, Retail trade have remained steady.

Personal and recreational services also remained relatively steady, while hospitality has see-sawed landing on a slight contraction for the period March – September.Wholesale also continued declining, and communications slumped and has been contracting since December 2011.

The sub-indices for sales, employment and new orders all expanded, however all three have landed only just above 50 points.

Mr Willox urged caution on reading too much into services expansion.

“Businesses contributing to the Australian PSI survey expressed ongoing concerns about weak local economic conditions, fragile consumer and business sentiment, and a low appetite for investment by both the public and private sectors,” he noted in the report.

Subdued Inflation Strengthens Case for Steady Interest Rates

The TD Securities Melbourne Institute Inflation Gauge rose by 0.3 percent in September, after a 0.1 percent rise in August.

In the 12 months to September, the Inflation Gauge increased by 1.9 percent, the highest annual rate since November 2014. However, that was still below the Reserve Bank’s target range for inflation of 2 to 3 percent.

Within the month, there was a 6.3 percent jump in tobacco prices because of an excise increase, a 4.5 percent rise in the cost of holiday travel and accommodation, and a 1.2 percent increase in fruit and vegetable prices. By contrast, petrol prices fell 5 per cent, the cost of newspapers, books and stationery slipped 4.2 per cent and clothing prices edged 0.7 percent lower

The number is at the bottom of the RBA’s comfort zone for inflation, of between 2 and 3 percent.

Last months survey revealed that during the month of August, there was a 4 percent increase in the cost of international holiday travel and accommodation, a 5.5 percent price rise for newspapers, books and stationery, while the cost of alcoholic beverages was 0.8 percent higher.

Petrol prices fell 2.1 percent in the month, domestic travel and holiday accommodation fell 2 per cent and prices for fruit and vegetables were down 0.5 percent.

Annette Beacher said the inflation gauge offered the Reserve Bank further fuel to stick with its “wait and see” approach on interest rates at tomorrow’s board meeting.

“I dare say, we’ll just get a repeat of last month where the economy is sub-trend; however, the lower exchange rate is helping and the RBA should just move on and move back to watching what is going on domestically and internationally,” Ms Beacher said.

She also predicted the central bank’s September meeting would be more focused on international developments than domestic issues.

“I would suspect that inflation may be a little bit further down on the list, because a lot has happened over the month of August,” Ms Beacher said. “We’ve seen some changes in expectations for US Federal Reserve tightening in September, we’ve seen the regime change in China, whereby they’re either supporting or not supporting stock markets. We’re seeing that the peg was loosened for the Chinese renminbi, and I dare say that international developments may actually occupy a fair amount of time.”

But she added that should the Reserve Bank feel the need to cut interest rates in the near future, the benign rate of inflation would give it the scope to do so.

ABS Definition: Service industries encompass the following activities, and divisions in the Australian and New Zealand Industrial Classification (ANZSIC): wholesale trade; retail trade; accommodation and food services; information media and telecommunications; financial and insurance services; rental, hiring and real estate services; professional, scientific and technical services; administrative and support services; public administration and safety; education and training; health care and social assistance; arts and recreation services; and other services.


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