SERVICES SECTOR ENDS THE YEAR ON A LOW NOTE

DECEMBER 2012

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KEY FINDINGS The latest seasonally adjusted Australian Industry Group/Commonwealth Bank Australian Performance of Services Index (Australian PSI®) fell 3.9 points in December to 43.2. This marks the end of a challenging year for the services sector which declined in all but one of the past 12 months. The low levels of household confidence and economic uncertainty reported by businesses during the year appears to have weighed on Christmas spending. After reporting mixed conditions in November, sub-sectors directly exposed to household spending (including retail trade and accommodation, cafes and restaurants) all reported that activity levels declined in December. Declining activity levels were also commonly reported from the rest of the services industry; only the finance and insurance sub-sector reported an expansion in activity during the month. On a more positive note for the sector, input price growth continued to ease in the month and is now well below the average level seen since the start of 2010.

SECTORS On a seasonally adjusted basis, only one sub-sector expanded in December, down from three in November (i.e. the activity index of the industry was above 50 points). The property & business services and communication services sub-sectors recorded particularly sharp falls in activity.This marks the end of a particularly challenging 12 months for the services sector.Over the past year, the majority of service sub-sectors reported that they recorded one or less months of growth. In particular, on a seasonally adjusted basis, both the wholesale trade and communication services sub-sectors recorded no expansions in activity over the year. The finance and insurance sub-sector was the best performing sub-sector in 2012 reporting nine months of growth.

SALES AND CAPACITYOn a seasonally adjusted basis, sales levels contracted further in December.The sales component of the Australian PSI® declined 2.8 points to 42.9 points and remains well below the critical 50 point level separating expansion from contraction. Sales growth was weighed down by sharp declines in sales across the property & business services, retail trade and wholesale trade sub-sectors. On the other hand, modest sales growth was recorded in the accommodation, cafes, and restaurants and finance & insurance sub-sectors. Capacity utilisation in the services sector (which is not seasonally adjusted) decreased by 0.6 points to 75.4%, which is in line with the average level recorded since the start of 2010.

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3 month moving averageAustralian PSI®

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Retail trade

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Health & community services

Personal & recreational services

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WHAT IS THE AUSTRALIAN PSI®?The Australian Industry Group – Commonwealth Bank 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.

More information can be obtained from the Ai Group website www.aigroup.com.au

SPONSOR STATEMENTCommonwealth Bank is delighted to be the sponsor of the Australian PSI® and is pleased to be able to provide the expertise of our Chief Economist Michael Blythe as the key spokesperson for the Performance of Services Index. The Commonwealth Bank is one of Australia's premier service organisations and with the majority of the Australian economy being services based we believe this important piece of research will add real value to the industry. It will provide insights and information that have not previously been available. We look forward to continuing to work with the Australian Industry Group to enhance and develop the Australian PSI®.

CONTACTInnes WilloxChief ExecutiveAi Group03 9867 0111

Michael WorkmanSenior Economist Commonwealth Bank of AustraliaMobile: 0414 870 394

Markit Economicswww.markiteconomics.com

© The Australian Industry Group, 2012This 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 repro-duced by any process or means with-out 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 interfer-ence 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.

AIG12484

NEW ORDERSOn a seasonally adjusted basis, new orders contracted further in December. The new orders sub-index decreased by 2.6 points to 43.7. The fall in the new orders sub-index was driven by solid declines in new order levels across the retail trade and health & community service sub-sectors. Falls in new order levels across these sectors was only partly offset by growth in the finance & insurance and the transport & storage sub-sectors. Businesses noted that falling new orders stemmed from weakness in large parts of the construction and retail sector, as well as some moderation in mining sector activity.

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EMPLOYMENT AND WAGESOn a seasonally adjusted basis, employment continued to contract in December in line with declining sales and new orders seen during the December quarter. The employment sub-index fell 4.3 points in December to 44.0. The fall in service sector employment reflected solid declines in staff levels across the personal & recreational services, communication services, and property & business services sub-sectors. On a non-seasonally adjusted basis, the average wages index increased by 3.7 points to 58.6 in December to finish the year in line with the average level recorded since the start of 2010. The average wages index was supported during December by solid wage growth across the accommodation, cafes & restaurants and communication services sub-sectors, despite worsening conditions for sales, new orders and employment.

STOCKS AND DELIVERIESOn a seasonally adjusted basis, stock levels (or inventories) in the services sector declined for a second consecutive month in December. The stocks sub-index of the Australian PSI® decreased by 3.2 points in the month to 42.8. The solid fall in the index was driven by declining stock levels in the property & business services and the finance & insurance sub-sectors.On a seasonally adjusted basis, deliveries to the services sector contracted sharply in December.The supplier deliveries sub-index decreased by 8.0 points this month to 41.9, just below the 50 point marker of expansion. The sharp decline in the index was driven by activity in the finance & insurance and personal & recreational service sub-sectors.

INPUT COSTS AND SELLING PRICESOn a non-seasonally adjusted basis, the input prices index fell 3.0 points to 57.7 in December, and is now below the average level recorded since the start of 2009. The average selling prices index continues to point to heavy discounting in the services sector.On a non-seasonally adjusted basis, the average selling prices index decreased by 1.9 point to 43.5 remaining well below the critical 50 point level separating expansion from contraction. The low level of the average selling prices index is consistent with recent weakness in Australian inflation more generally, with headline inflation recording just 2.0% p.a. in the third quarter of 2012 (and with even smaller price changes for some foods and other consumer goods).

AUSTRALIAN PSI®* DECEMBER 2012 December 2012 November 2012 Monthly Change Direction Rate of Change Trend** (Months)AUSTRALIAN PSI® 43.2 47.1 -3.9 Contracting Faster 11SALES 42.9 45.7 -2.8 Contracting Faster 6NEW ORDERS 43.7 46.3 -2.6 Contracting Faster 6EMPLOYMENT 44.0 48.3 -4.3 Contracting Faster 11SUPPLIER DELIVERIES 41.9 49.9 -8.0 Contracting Faster 6INVENTORIES 42.8 46.0 -3.2 Contracting Faster 2INPUT PRICES 57.7 60.7 -3.0 Expanding Slower 118SELLING PRICES 43.5 45.4 -1.9 Contracting Faster 14WAGES 58.6 54.9 3.7 Expanding Faster 41CAPACITY UTILISATION (%) 75.4 76.0 -0.6 Results are based on the responses of around 150 companies. Forward seasonal factors were generated by the ABS in April 2012.* Australian PSI® data is seasonally adjusted for sales, new orders, employment, supplier deliveries, inventories and input prices.** Number of months moving in current direction.If you would like to participate in this survey, please send your details to economics@aigroup.asn.au

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