News Service from House Harris

Services sector grows for 1st time in 15 months in June, survey

SYDNEY, July 3 AAP - Rising confidence among consumers about the outlook for the economy has helped the services sector expand for the first time in 15 months in June, a survey shows.

The Australian Industry Group-Commonwealth Bank of Australia performances of services index (PSI) rose by 10.3 index points in June to 50.2 points.

It was the first time since March 2008 that the index moved above the key 50 points level, which separates expansion from contraction in activity.

Australian Industry Group chief executive Heather Ridout said result reflected more positive news for the sector following the release earlier this week of strong than expected retail figures for May.

Retail sales rose one per cent in May, against market expectations for a 0.5 per cent increase, the Australian Bureau of Statistics reported.

"The Australian PSI results suggest that services sector activity strengthened more broadly in June on the back of rising consumer confidence, low interest rates and the federal government's cash stimulus," Ms Ridout said in a statement.

"The return to growth in sales and new orders, albeit at a modest pace, is particularly encouraging and is a clear and positive sign that the sector is responding to improvements in consumer and home buyer confidence.

"The broadening base of the improvement, with solid gains in finance and insurance and more modest increases in retail trade, accommodation, cafes & restaurants, and health and community services also suggests that some of the clouds around the outlook for services are lifting."

Kinetic Securities chief economist Clifford Bennett said the PSI result was another sign the worst may have passed the local economy, which has been under pressure due to the global economic downturn.

"It was only just expansionary, but certainly suggesting further stabilisation and a recovery taking hold," Mr Bennett said.

Ms Ridout said ongoing improvement in the services sector will depend on consumer confidence, particularly with unemployment expected to rise over the next 12 months.

The federal government has forecast the jobless rate to peak at 8.5 per cent in late 2010 from a current 5.7 per cent.

Commonwealth Bank senior economist John Peters said improvements in the services sector reflected other economic data indicating the local economy could avoid a severe recession in 2009 despite the global backdrop.

"After the positive Q1 GDP (gross domestic product) number, the rebound in the June Australian PSI lines up with a string of relatively positive economic data which have hit the deck in recent weeks, which suggest that Australia's economic downturn is not going to be as grim and debilitating as those in the G7 economies and fellow G20 economies," Mr Peter said.

"A modest upturn is likely late in 2009.

Mr Peters said mortgage rates at generational lows and the federal government's stimulus packages have helped lift the outlook for the domestic economy.

Activity expanded in Victoria, Western Australia and Tasmania in June.