Services sector expands in May

Rising confidence among consumers helped lift activity in the services sector to expand for the first time in 15 months, a survey says.

The Australian Industry Group-Commonwealth Bank of Australia performances of services index (PSI) rose by 10.3 index points to 50.2 points.

It was the first time since March 2008 that the index was above the key 50 points level, which separates expansion from contraction in activity.

Australian Industry Group chief executive Heather Ridout said June's PSI was another piece of positive economic news following the strong retail figures for May.

Retail sales rose one per cent in May, the Australian Bureau of Statistics said this week.

"The Australian PSI results suggest that services sector activity strengthened more broadly in June on the back of rising consumer confidence, low interest rates and the Government's cash stimulus," Ms Ridout said in a statement.

"The return to growth in sales and new orders, albeit at a modest pace, is particularly encouraging and is a clear and positive sign that the sector is responding to improvements in consumer and home buyer confidence.

"The broadening base of the improvement, with solid gains in finance and insurance and more modest increases in retail trade, accommodation, cafés & restaurants, and health and community services also suggests that some of the clouds around the outlook for services are lifting."

Ms Ridout said a return to growth would depend on how the economy performs, particularly with unemployment expected to rise over the next 12 months.

Commonwealth Bank senior economist John Peters said improvements in the services sector reflected other economic data indicating the local economy could avoid a severe recession in 2009 despite the gloom around other nations.

"After the positive Q1 GDP (gross domestic product) number, the rebound in the June Australian PSI lines up with a string of relatively positive economic data which have hit the deck in recent weeks which suggest that Australia's economic downturn is not going to be as grim and debilitating as those in the G7 economies and fellow G20 economies," Mr Peter said.

"A modest upturn is likely late in 2009.

"The pick-up in the key leading component of the Australian PSI new orders is particularly encouraging."

Mr Peters said generational-low interest rates and the federal government's stimulus packages have helped lift the outlook for the domestic economy.

Activity expanded in Victoria, Western Australia and Tasmania.