The Australian Industry Group Performance of Services (PSI) for April is out and shows a precipitous drop:
- The latest seasonally adjusted Australian Industry Group/Commonwealth Bank Australian Performance of Services Index (Australian PSI®) slumped by 7.4 points to 39.6 in April (readings below 50 indicate a contraction in activity with the distance from 50 indicative of the strength of the decline). This was the lowest monthly reading since March 2009.
- The sharp fall in the Australian PSI® was driven by declines in the sales and new orders components of the index, which are now both at their lowest levels in almost three years.
- Reports of weak trading conditions were widespread across all services sub-sectors and all states.
- Consistent with these reports and with the latest weakening in Australian inflation (with headline inflation just 1.6% p.a. in the March quarter), the input prices and average wages and selling prices indices are now back at or below the levels seen during the Global Financial Crisis.
To give you some perspective, here is what the index showed in 2008:
So, this April we’re at the same level as August 2008.
Now, I’m not a great fan of this index. Note on the top chart how it showed recession in services throughout 2010, then expansion in 2011, which is the reverse of what actually happened in my view. Nonetheless, a drop of this magnitude is signaling that something has quite wrong with the services economy in April. The internals of the survey are also very poor. The most worrying is April sales, which literally collapsed to GFC levels:
New orders were also pounded:
And the weakness was broad based:
In short, this report is suggesting that we are headed into recession. Add in the R.P.Data Index of a resumption of house price falls in April and I’m getting the distinct impression that we’re going through some kind of freeze in aggregate demand.
If I had to pick a cause, I’d say that the bank’s shift to unilateral interest rate moves has dramatically undermined confidence in the RBA insurance policy. Folks are headed into their shells.
We might also speculate that this is why the RBA pushed the panic button, it may have picked this up in its industry liaison or one of its other proprietary data sources.