By Sophia Rodrigues

SYDNEY (MNI) – Activity in the Australian services sector fell in
October and also dipped in the contraction territory for the first time
in three months due to a fall in sales and new orders, the latest
services index from Australian Industry Group/Commonwealth Bank showed.

The seasonally adjusted index fell 1.5 points to 48.8, after
dropping 1.8 points in September.

But in 3-month moving average terms, the index has hovered around
the critical 50 point level six consecutive months, suggesting
that overall activity in the services sector has stabilised following a
prolonged period of decline, AIG/CBA said Thursday.

Four of the nine sub-sectors expanded in October, compared
with five in September, with the index boosted by strong growth in
professional business service sub-sectors which recorded the strongest
business conditions in recent months.

In terms of components of the index, five fell in the contraction
territory in October, compared with just three in September. In August,
all components of the index were in expansion zone.

The largest drop was seen in the sales sub-index which fell 4.4
points to 47.8. New orders fell in the contraction zone, down 1.3 points
to 49.4.

Index readings above 50.0 signal expansion in service sector
activity, while readings below 50.0 signal contraction. The further the
index above or below 50, the faster the expansion or contraction in the
sector.

The employment sub-index rose by 1.8 points to 49.6, recouping some
of the 4.2-point loss in September.

Capacity utilization fell to 74% from 75.9%, after rising in both
September and August.

AI Group chief executive Heather Ridout said the softness in
services sector activity in October alongside the continuing weakness in
manufacturing strongly reinforces the Reserve Bank of Australia’s
decision to reduce interest rates.

“While there are some signs that business spending may be gradually
recovering, consumers clearly remain tentative and flat conditions
persist across much of the economy,” Ridout said.

The RBA cut the cash rate by 25 basis points to 4.5% on Tuesday in
the first rate move since November last year.

Commonwealth Bank senior economist John Peters said the RBA rate
cut should provide some boost to household and business confidence and
to struggling segments of the economy including the services sector.

“In 2012, we see local GDP growth picking up to near 4% due to the
stellar terms of trade and the robust mining investment boom which has a
long way to run yet. Such an outcome is likely to drive jobs growth and
push unemployment lower a labour market outcome that should help lift
consumer spirits and spending activity,” Peters said.

— srodrigues@marketnews.com +61-2-9716-5467 **

** Market News International Sydney **

[TOPICS: MAUDS$,M$A$$$,M$L$$$,MT$$$$,MMLRB$]