The services sector recorded a lift in activity in January, following three consecutive months of decline, according to the latest Australian Industry Group/Commonwealth Bank Australian Performance of Services Index (Australian PSI®).

The latest seasonally adjusted index was 2.9 points stronger at 51.9 in January (readings above 50 indicate an expansion in activity).

Strong growth in accommodation, cafes & restaurants (56.4), finance & insurance (67.5) and personal & recreational services sub-sectors (66.6) drove the positive result. The remaining sub-sectors contracted - highlighting the ongoing patchiness of the services sector. In six of the nine sub-sectors, a majority of businesses reported deeper discounting of selling prices compared to a year ago.

Australian Industry Group Director Public Policy, Peter Burn, said: "The lift in services sector activity is a welcome change from the contraction in the sector in the last quarter of 2011. The return of key sectors directly exposed to household spending to positive territory provides a tentative sign that the easing of interest rates towards the end of 2011 may have lifted consumer confidence despite the dampening stream of news coming from Europe. Overall, however, the services sector remains patchy and continues to face strong headwinds including from the strength of the dollar and flat labour market conditions," Dr Burn said.

Commonwealth Bank Senior Economist, John Peters said: "It is heartening to see the Australian PSI® back in expansionary territory, after very soft fourth quarter 2011 readings below 50. The RBA's official rate cuts totaling 0.5% in November and December have probably had some positive spinoff for segments of the services struggling against the substantial negative headwinds of the robust Australian dollar, diffident and frugal consumers, and weak business confidence.

"With continuing large question marks swirling around global markets relating to the European sovereign debt crisis, we expect the RBA to cut rates again by 0.25% soon, probably as early as next week's February RBA Board meeting, to help further 'fireproof' the local economy from any potential negative fallout from Euroland's chronic fiscal and debt woes. This should in turn give all sectors of the economy, including services, some further joy," Mr Peters said.

Australian PSI® Key Findings for January:

• The latest Australian Industry Group/Commonwealth Bank Australian Performance of Services Index (Australian PSI®) was in positive territory in January lifting 2.9 points to 51.9 (readings above 50 indicate an expansion in activity).
• Accommodation, cafes & restaurants (56.4), finance & insurance (67.5) and personal & recreational services sub-sectors (66.6) were the strongest performing sub-sectors.
• Wholesale trade (37.7) property & business services (44.4) and communication services (30.0) recorded significant declines in January.
• New orders across services increased solidly - up 3.7 points to 54.1.
• Respondents reported marking down selling prices in an effort to stimulate demand. This was reflected in the selling prices sub-index which was 2.0 points weaker in January (46.9).
• After four months of decline, employment in the sector expanded.

www.aigroup.com.au