The business services sector is one of the fastest growing areas of the economy, according to the latest CommSec Business Sales Indicator, as improving balance sheets allow companies to spend more on critical investment purchases.
While the BSI for October, which tracks the value of credit and debit card transactions, shows that retail spending remained largely unchanged, CommSec chief economist Craig James says there are certain areas of the economy that remain strong.
He points to the contracted services and personal services providers as examples, each recording growth of 1%. But the business services sector remains the strongest, up by 1.1% during the month, a trend James says is due to businesses simply having more to spend.
“In terms of business services, this comes after a fairly long period during which business services wasn’t showing much growth it all. So the fact that businesses are starting to open their wallets and spend a little bit gives a flow-on effect.”
He also says a long period of no movements on interest rates, (the survey was taken before the Cup Day rate rise), would have provided businesses with enough confidence to keep spending.
“We also have strength in the mining services and infrastructure sectors starting to come through. And I think the other part is that over the past 12 months, balance sheets have improved and that’s what we are seeing reflected. They have a few extra dollars to spend.”
“I think it is a case that businesses have continued to invest in a tight market in order to give themselves an edge over the competition,” he says.
The mail order and telephone order providers continued to record negative growth of 2%, while miscellaneous stores were down by 0.8%. Automobiles and vehicles recorded no change.
The BSI pins the Northern Territory as recording the highest growth in spending at 1.1%, followed by Western Australia at 0.5%. Only three states recorded negative growth – Queensland, Victoria and South Australia.
But James pins New South Wales as a strong performer, coming off a particularly low base.
“We can only summarise because we don’t have the answers behind this. I think in terms of New South Wales, it’s starting to finally shake off the global financial crisis. Employment in the financial services sector is getting back to normal.”
“There has also been a lift in terms of dwelling starts after a long period of subdued building activity, so that’s partly responsible for some of the lift in New South Wales.”
But the BSI still brings some bad news. While the fact growth remains flat is somewhat encouraging, James warns that the BSI has recorded its largest annual decline in six years and that spending remains “elusive”.
“This result does pre-date the rate increase in November, and say it may be that businesses have become a little circumspect again. That long period of interest rate stability caused businesses to be a little more proactive.”
He points to the ABS data which shows that over the past six months, retail trade has contracted by 3.9% in trend terms of the past year, and this suggests retailers and businesses will face a challenge in the lead-up to Christmas.
“Given that the BSI is far broader in coverage then ABS retail trade, incorporating business and government spending, the results highlight the weakness of spending across the economy.”
He warns that while the general economy remains strong, “it is important to recognise that overall growth remains weak and the upward trend we had been witnessing appears to have slowed”.
Patrick Stafford is a freelance journalist and a former deputy editor of SmartCompany.
