Is Australia heading into a recession?

The services sector, which represents 70% of the economy, has another bad month

70% of the economy is close to being in recession with the news that the services sector is going from bad to worse.

The services sector represents 70% of the economy, and very few of its sub-sectors are expanding.

The Australian Industry Group Australian Performance of Services Index (PSI) contracted 0.4 points in August to 39.0, and has now been below the 40 point level for two consecutive months, and declined over the last three (A reading below 50 indicates contraction). These are the lowest levels for the Australian PSI since the GFC-related downturn in 2008-09.

The data points to further slowing in services sector activity, and therefore in GDP in the September quarter. Only health and community services posted positive growth.

Capacity utilisation in the services sector is now below the long term average, and sales levels have contracted for the fifth consecutive month, although did rise slightly to 35.5 points. The wholesale trade and transport & storage sub-sectors continued to contract, thanks to subdued demand for storage and transport of goods from the retail, manufacturing and construction industries. That could have a big impact on transport and logistics companies like Toll Holdings (ASX:TOL), Asciano (ASX:AIO), Qube Holdings (ASX:QUB) and Aurizon Holdings (ASX:AZJ).

New orders continue to contract, with not one sub-sector seeing any growth in orders during August, while rising wages and input prices continue to rise, placing additional pressure on business margins.

But the sector could receive a boost post the election, with around one in five businesses noting that the most important factor affecting activity in August was the uncertainty associated with this weekend’s federal election.

Foolish takeaway

Investors will be hoping the data improves following the election; otherwise Australia could be heading for a recession – our first in more than 21 years.

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Motley Fool writer/analyst Mike King doesn’t own shares in any companies mentioned.

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