Services sector businesses poised to dominate

February 13, 2017

Transitioning from a commodity to a service economy

Australia enjoyed a mining investment boom for much of the early part of this century. But as commodity prices started to decline in 2011, the economy started to transition away from the mining sector and instead rely on activity in the services sector to support economic growth.

Many service industries have benefited as this transition has occurred. For instance, the Australian Industry Group’s Australian Performance of Services Index (AIG index) rose again in January, the third month it has achieved a gain. The AIG index is sitting at 54.5 points, with any figure above 50 indicating the sector is growing.

A majority of sub-sectors within the services sector are also experiencing strong gains recently, with seven out of nine sub sectors recording a reading above 50 in January:

  • Personal and recreational services rose to 65.0 points
  • Finance and insurance strengthened to 62.7 points
  • Retail trade achieved 55.6 points
  • Wholesale trade improved to 58.2
  • Property and business services grew to 54.0 points
  • Transport and storage achieved 51.6 points, the first rise since September 2011
  • Health and community services were stable at 50.8 points.

Factors that led to the positive performance of the services sector include the relatively lower Australian dollar in January, as well as growing consumer confidence. The Westpac-Melbourne Institute Consumer Sentiment Index (Westpac-Melbourne Index) rose to 97.4 in January, the first time the index has grown in the last quarter.

The sectors that declined were communication services, which have been declining for four months (47.4 points) and hospitality including accommodation, cafes and restaurants. This figure dropped to 43.9 points and has been contracting for more than a year.

In other results from the January Westpac-Melbourne Index, figures indicate sales in the service sector enjoyed a buoyant month, although growth was not as strong as December. The sales sub index recorded 57.4 points, a decline of 4.7 points compared to the December result of 62.1 points.

The new orders index also remained in positive territory. But in the same way as the sales index retreated in January, so too did the new orders index, falling by 8.6 points to 51.8 points.

It was a similar story for the employment index, which also rose at a more moderate pace in January. The sub-index fell 2.8 points to 53.8 points, compared to the December result of 56.6 points.

At the same time, many businesses in the mining sector are also starting to recover following the downturn in commodity prices as the cycle has bottomed and improved. For instance, the iron ore spot price has risen from US$47 a tonne to US$80 a tonne.

What this means is that now’s the time for both services and mining businesses to rethink their asset finance program to account for the current economic climate.

Review which assets are due to be renewed, which assets could benefit from a capital solution rather than owned, and put together a comprehensive, long-term plan to ensure your business has access to all the resources it needs to deliver an outstanding performance.

Companies that do this give themselves a competitive advantage in a world characterised by market disruption and uncertainty. It’s an opportunity few businesses can afford to ignore.

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