Australian December Services Industry Stalls on Rate Increases

Jan. 6 (Bloomberg) -- Australia’s services industry stalled in December as companies reported a slump in new orders and suppliers cut deliveries.

The performance of services index fell 2.5 points to 50 from November, when it dropped 2.3 points, Commonwealth Bank of Australia and the Australian Industry Group said in Sydney today. A figure below 50 indicates the industry is shrinking.

Weakening demand for services follows central bank Governor Glenn Stevens’s decision to raise the benchmark lending rate on Dec. 1 for an unprecedented third straight month. Specialty Fashion Group Ltd., an Australian clothing retailer, said today that trading over the Christmas to New Year holiday period was “tough.”

Today’s report “confirms that the recent improvement in the services sector lacks traction and adds weight to arguments for a pause to interest rates,” said Australian Industry Group Chief Executive Heather Ridout.

The index rose in October to the highest level in 19 months before falling in November and last month.

“The business environment remains a challenge for many firms, particularly those in the consumer-related sectors of retail trade,” Ridout said.

Rising retail sales in the first 10 months of last year helped the nation’s economy skirt the global recession after the government distributed more than A$20 billion ($18 billion) in cash to households and the central bank slashed borrowing costs to a half-century low of 3 percent in April. Most of the handouts were completed in the first half of 2009.

Rate Increases

The Reserve Bank began the first of three straight monthly interest-rate increases in October, taking the benchmark rate to 3.75 percent last month.

“Christmas 2009 trading was more challenging than in 2008, with the discounting in the market being more aggressive than we have seen for many years,” Gary Perlstein, chief executive officer at Specialty Fashion, said in a statement today.

“This may be the first indication that there will be more difficult trading conditions” in the first half of 2010, “when consumers will not be receiving government handouts and interest rates are on the rise.”

Investors are betting there is a 48 percent chance of a quarter-point increase in the benchmark lending rate to 4 percent at the central bank’s next meeting on Feb. 2, according to Bloomberg calculations based on interbank futures on the Sydney Futures Exchange at 7:28 a.m. Chances of a quarter-point move in March are at 92 percent.

Today’s report, which is based on a poll of about 200 companies, is similar to the U.S. non-manufacturing ISM index.

The report measures sales, new orders, deliveries, inventories and employment for companies such as banks, real estate agents, insurers, restaurants, transport firms and retailers to compile the overall performance of services index.