The services sector continued to experience modest growth in April, with the seasonally-adjusted Australian Industry Group - Commonwealth Bank Performance of Services Index (PSI) unchanged at 51.4.
While services sector growth appears to have steadied in the past two months, it remains significantly weaker than in the second half of 2004, when the index averaged in the mid to high 50s (an Australian PSI reading above 50 points indicates that services activity is generally expanding; below 50, that it is declining).
Sales and supplier deliveries recovered slightly, with both expanding in April after declines in the previous two months. But growth in new orders and employment slowed and inventory levels fell for the second time in three months.
Input prices in April also increased at their fastest pace since June 2004, largely reflecting higher energy costs. Seven of the nine sectors reported higher increases in input costs in April, including over three quarters of all respondents in the transport and storage sector.
Despite earlier signs of improvement, retail trade reported a contraction in activity in April, as did wholesale trade, for the third consecutive month. Activity expanded in the other seven sectors, down from eight in March, with growth strongest in accommodation, cafes and restaurants.
Commonwealth Bank chief economist Michael Blythe said the economic headwinds into which the economy is heading have taken the edge off growth in the services sector.
"Modest rates of growth are probably inevitable in an economy pushing up against capacity constraints. But interest rate uncertainty, higher energy prices and other costs are also taking a toll. The relative resilience of employment intentions, however, does suggest some underlying momentum remains," Mr Blythe said.
Ai Group chief executive Heather Ridout said both the PSI and PMI results for April showed many sectors of the economy were being hurt by rising costs.
"Continuing cost increases have contributed significantly to the recent weakening in consumer demand, as well as directly affecting production and profitability in manufacturing.
"The March quarter CPI, however, showed that many services sectors, particularly those involved with government services or those affected by government pricing decisions, were able to pass on the cost increases. Local manufacturers, on the other hand, are in many cases being forced to absorb them," Mrs Ridout said.