MEDIA CONTACT Gemma Williams Australian Industry Group Tel: 0401 664 047

DECEMBER 2013

SERVICES SECTOR DOLDRUMS CONTINUE IN DEC

Australian PSI Dec 2013: 46.1 KEY FINDINGS

USA Markit PSI Nov 2013: 55.9

Eurozone flash PSI Dec 2013: 51.0

UK Markit PSI Nov 2013: 60.0

Japan Markit PSI Nov 2013: 51.8

China HSBC PSI Nov 2013: 52.5

The latest seasonally adjusted Australian Industry Group Australian Performance of Services Index (Australian PSI ) moved 2.8 points lower to 46.1 points in December. This was the lowest level for theAustralian PSI since August. The Australian PSI has been indicating contraction (below 50 points) since February 2012, the longest run of continuous contraction since this data series commenced in 2003. The decline in the Australian PSI in December reversed the improvement seen over the previous three months following the election. In December, the decrease was driven by a deterioration in the employment sub-index, to 47.7 points, after it moved above 50 points in November. The activity sub-indexes for new orders, stocks and deliveries all declined in December, taking all five of the activity sub-indexes below 50 points. Among the sub-sectors that make up the Australian PSI , only the health and community services and the finance and insurance sub-sectors expanded in December (58.0 points and 65.5 points respectively, three month moving averages). Respondents generally noted a decline in both business and consumer confidence in the latest survey, suggesting that the boost to sentiment following the Federal election has largely faded. For many businesses, the earlier improvement in confidence never translated into a solid improvement in demand and activity. Businesses also voiced concerns this month over the uncertainties surrounding the short-term outlook for the domestic economy. These concerns were largely confirmed by the worsening outlook for the domestic economy in the Governments mid-year Budget update (the MYEFO), released just a week after this Australian PSI survey was taken.

ACTIVITY SUB-INDEXES

The sales sub-index in the Australian PSI improved marginally by 0.4 points to 47.7 points in December. This sub-index has been indicating an ongoing contraction (readings below 50 points) since March 2013 (50.8 points). The new orders index in the Australian PSI also eased for a third-consecutive month in December, to 43.0 points. This leading indicator of demand for services has been indicating contraction (readings below 50 points) since June 2012 (50.3 points). The employment sub-index in the Australian PSI fell by 5.0 points in December, taking it back into contraction (47.7 points) after this sub-index expanded (above 50.0 points) in the previous month. This soft reading suggests that any post-election or seasonal growth in new hiring among services businesses has generally faded. Supplier deliveries eased further in December, with this sub-index falling 1.5 points to 47.6 points, indicating a mild contraction in net deliveries overall (under 50 points), after this subindex expanded temporarily in October 2013. Inventories (stocks held by companies) contracted again in December, and at a faster pace than November. The inventories sub-index worsened by 4.9 points to 43.7 points, suggesting that more businesses wound down their stocks in the lead-up to Christmas. Capacity utilisation across the services industries decreased by another 1.2 percentage points to 74.5% of current capacity being utilised in December, just below its 12-month average of 75%.

PRICES SUB-INDEXES

The input prices sub-index in the Australian PSI declined by 3.8 points to 60.3 points in December, taking it further down from its recent peak in September (66.3 points), although it still pointed towards an expansion (above 50 points). Wage pressures picked up again in December, with the average wages sub-index in the Australian PSI rising by 3.3 points to 58.7 points in December. This index is suggesting some volatility in the levels of wage growth in the services industries. The selling prices sub-index in the Australian PSI decreased by 1.7 points to 43.5 points in December, below its recent average (45.3 points) over the last 12 months.The stabilisation in selling prices in October has clearly not been sustained, likely reflecting downward pricing pressures from subdued sales and new orders (both sub-indexes in contraction) in the services industries.

RETAIL TRADE; WHOLESALE TRADE *

The retail trade sub-sector index in the Australian PSI improved for a third straight month to 48.6 points in December (up 2.4 points, three month moving average). This was the best reading for this sub-sector index since April but it remained in mild contraction (below 50 points, three month moving average). The improvement in the retail trade sub-sectors index is consistent with the improving growth in nominal retail sales (as published by the ABS) since July this year, suggesting that the benefits from a lower dollar and a lower cash rate may be finally starting to flow through. Retail trade is Australias second largest employing industry (after health and community services), so improvement in local retail sales is crucial to national jobs growth. The wholesale trade sub-sector in the Australian PSI declined by 0.7 points to 46.9 points in December (three month moving average), but this was still the second best reading for this sub-sector this year. The wholesale trade sub-sector has been in net contraction (under 50 points) in every month since February 2011 (three month moving averages), as it shares similar challenges to those faced by the retail trade sub-sector, which is its major customer.

HOSPITALITY; HEALTH SERVICES; RECREATIONAL SERVICES *

The accommodation, cafes and restaurants sub-sector (hospitality) index decreased in December to 37.9 points (down 2.6 points, three month moving average), indicating ongoing severe contraction in this sub-sector (readings below 50 points). This contraction has been apparent since May 2013, following a period of reasonable growth in the first quarter of 2013. 2014 might be a better year for this sub-sector if the lower dollar is able to encourage overseas holiday spending back to local destinations and/or to boost inbound tourism numbers. The personal and recreational services sub-sector picked up marginally in December (up 0.8 points to 43.9 points, three month moving averages).This sub-sector has been contracting since August this year, suggesting consumers are again cutting back on their discretionary entertainment services spending. The large health and community services sub-sector lifted to 58.0 points in December. It has indicated expansion in activity in all but two months of 2013. It remains one of only two sub-sectors to show expansion this month in the Australian PSI (in three month moving averages).

PROPERTY AND BUSINESS SERVICES; FINANCE SERVICES *

The property and business services sub-index remained roughly stable at 43.5 points in December. This sub-sectors index has been below 50 points since December 2011 (three month moving averages), as tough trading conditions for business-to-business services such as real estate, accounting, legal, engineering, consulting, recruitment and administrative services continue. Any pick-up in business confidence stemming from the Federal election has failed to boost actual demand. The finance and insurance sub-sectors index moved up slightly by 0.9 points to 65.5 points in December, its highest level in 2013 (three month moving average). This reading likely reflects the stronger levels of transactions of late (e.g. in property and other asset markets). This followed a period of six months of contraction this year, reflecting a period of postponed financing decisions (from April to September, three month moving averages).

COMMUNICATION SERVICES; TRANSPORT SERVICES *

The communications sub-sectors index plunged by 5.6 points to 29.2 points in December, the lowest level since this data series started in 2003. This sub-sector has been contracting (below 50 points) at an alarming rate since November 2011 (three month moving average). Conditions are not yet improving in this key business-to-business sub-sector, with its outlook potentially hinged upon the policy decisions surrounding the NBN network. Survey participants said the uncertainties surrounding the NBN are affecting their forward contracts. The transport and storage services sub-sector also contracted considerably in December by 4.9 points to 36.5 points (three month moving averages), indicating a continuation of the weakness that has been recorded since July 2012. Despite early signs that consumer demand for discretionary goods in the retail sector and residential building activity are gradually improving, these are yet to flow on to higher transport orders. Conditions may improve in 2014 as residential building activity strengthens in many locations around Australia. Index this month 46.1 47.7 43.0 47.7 43.7

Index this month 47.6 60.3 43.5 58.7 74.5 Change from last month -1.5 -3.8 -1.7 3.3 -1.2 12 month average 44.8 62.4 45.3 57.7 75.0

Seasonally adjusted index Australian PSI Sales New Orders Employment Stocks

Change from last month -2.8 0.4 -3.6 -5.0 -4.9

12 month average 44.8 43.5 43.5 48.1 43.2

Seasonally adjusted index Supplier Deliveries Input Prices Selling Prices ** Average Wages ** Capacity utilisation **

* All sub-sector indexes in the Australian PSI are reported as three month moving averages (3mma), so as to better identify the trends in these volatile monthly data. ** Unadjusted.
What is the Australian PSI ? The Australian Industry Group Australian Performance of Services Index (Australian PSI ) is a seasonally adjusted national composite index based on the diffusion indexes for sales, orders/new business, deliveries, inventories and employment with varying weights. An Australian PSI reading above 50 points indicates services activity is generally expanding; below 50, that it is declining. The distance from 50 is indicative of the strength of the expansion or decline. For further economic analysis and information from the Australian Industry Group, visit http://www.aigroup.com.au/economics. *For further information on international PMI data, visit http://www.markiteconomics.com or http://www.cipsa.com.au. The Australian Industry Group, 2013. This publication is copyright. Apart from any fair dealing for the purposes of private study or research permitted under applicable copyright legislation, no part may be reproduced by any process or means without the prior written permission of The Australian Industry Group. Disclaimer: The Australian Industry Group provides information services to its members and others, which include economic, and industry policy and forecasting services. None of the information provided here is represented or implied to be legal, accounting, financial or investment advice and does not constitute financial product advice. The Australian Industry Group does not invite and does not expect any person to act or rely on any statement, opinion, representation or interference expressed or implied in this publication. All readers must make their own enquiries and obtain their own professional advice in relation to any issue or matter referred to herein before making any financial or other decision. The Australian Industry Group accepts no responsibility for any act or omission by any person relying in whole or in part upon the contents of this publication.