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Australia’s service sector in March slumped into contraction for the first time after 26 months as the oil price shock continued to weigh heavily on the domestic and international economy.
The seasonally adjusted S&P Global Australia Services PMI Business Activity Index dipped to 46.3 from 52.8 in February, according to the think tank’s Tuesday news release.
The decline was attributed to the ongoing Iran war, which weakened new orders and new business, as well as business sentiment, which fell to its lowest in 28 months.
“The S&P Global Australia Services PMI data for March paint a picture of how the war in the Middle East has impacted companies, and the results are concerning,” S&P Global Market Intelligence economics director Andrew Harker said. “Business activity was down solidly amid a renewed fall in new orders, with the rate of decline in output more pronounced than the earlier flash reading, suggesting that downwards momentum gathered pace over the course of the month.”
Among sectors, the finance and insurance sector recorded the sharpest reduction.
In a March note, Fitch said that the ratings of Australia’s big four — Westpac (ASX:WBC, NZE:WBC), ANZ Group (ASX:ANZ, NZE:ANZ), Commonwealth Bank of Australia (ASX:CBA) and National Australia Bank (ASX:NAB) — are well positioned to withstand macroeconomic headwinds for the next two years. However, the Middle East conflict may weaken their financial metrics if it is prolonged.
Barrenjoey analyst Jon Mott warned investors to stay away from bank stocks as there is the possibility of the war in Tehran not being resolved in the near term. Moreover, analysts from Morgan Stanley and Macquarie lowered their outlook on the banking industry, according to a March 25 report in the Financial Review.
Only the consumer services sector saw an increase in activity, S&P Global said.
Despite the slowdown in demand and orders, service providers added more manpower, with employment rising for the fifteenth straight month. Data indicated that employers are working on expanding their work capacity on future projects.
Meanwhile, the S&P Global Australia Composite Output Index declined to 46.6 in March from 52.4 in the prior month, showing that the private sector business activity contracted for the first time in a year and a half.