Service sector growing, but fragile

The Australian Industry Group's PSI lifted 3.4 points to 51.8 points in February, moving above the 50 mark to indicate the sector is growing.

Australia's services sector expanded in February, but growth was patchy and fragile.

The Australian Industry Group's Performance of Services Index (PSI) lifted 3.4 points to 51.8 points, with a move above 50 indicating the sector is growing.

The growth was driven by health and community services, which includes health, welfare and education.

Household consumer spending in the sub sector has been robust, as shown in Wednesday's December quarter GDP figures, which economists have put down to Australia's ageing population.

The Ai Group report said the low Australian dollar has also benefited personal and recreational services because consumers have been spending more on local services instead of buying imported goods or overseas holidays.

Ai Group chief executive Innes Willox says the result is encouraging.

"The bounce in the services sector in February is a tentative yet positive sign that consumer confidence is strengthening," Mr Willox said.

But despite expansion of some sub sectors in February, growth was patchy.

Retail and wholesale trade sub sectors have suffered primarily due to the low dollar and high competition.

The prices of imported products have risen, but tight competition has restricted their ability to hold their margins by passing on their costs to consumers.

Ai Group said the worst performer was transport and storage services sub sector, which has been contracting for 11 of the past 12 months.

Demand remained depressed, despite the activity in residential construction, the report said.

Mr Willox said the sector could clearly benefit from extra incentives for business investment in May's federal budget.

"The picture painted by the Australian PSI is still one of fragility and vulnerability," he added.

"This should be a warning to policy makers against an excessively restrictive Federal Budget in May and highlights the room for a targeted lift in incentives for business investment."