Mining dip starting to weigh on services sector

A key private index of services sector activity has found the recent slump in commodity prices is feeding through to companies supporting the miners.

The Australian Industry Group - Commonwealth Bank Performance of Services Index (PSI) fell 0.5 points in September to 41.9 - a reading below 50 indicates the sector is contracting, with a lower reading indicating a faster pace of contraction.

The report found ongoing weakness in manufacturing and construction were the main drags on services activity, but businesses also complained of uncertainty about projects in the mining sector weighing on trade.

Only two of the sub-sectors - health and community services and accommodation, cafes and restaurants - reported an improvement in activity.

However, the pace of contraction slowed in other interest rate sensitive consumer sectors such as wholesale and retail, indicating that previous interest rate cuts may be gaining some traction.

The Ai Group's chief executive Innes Willox says further rate cuts are needed to maintain that momentum.

"The overall state of the services sector, which is being squeezed between low selling prices and rising costs, including from the carbon tax, suggests that further rate reductions will be needed before the sequence of negative news is reversed," he noted in the report.

"This will be especially crucial for the household-related services sub-sectors, in the lead-up to their annual Christmas sales peak."

Source: ABC News, 3 October 2012