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Services sector yet to spark post-lockdown

Australia’s services sector has yet to receive the full benefit of the end of COVID-19 restrictions in the nation’s major states.

The Australian Industry Group performance of services index rose just 1.9 points in October to 47.6, remaining below the key 50 point mark that separates contraction from expansion in the sector.

It was third month in a road the industry has been in contraction.

“A more robust recovery was inhibited by lingering activity restrictions, barriers to interstate movement and the same disruptions to the supply of inputs that are being felt in other parts of the economy,” Ai Group chief executive Innes Willox said.

“Service sector businesses will be hoping that the further unwinding of COVID restrictions and a burst of sales as the holiday season approaches, will lift the sector and see it enter 2022 from a position of strength.”

More broadly, Reserve Bank of Australia governor Philip Lowe is expecting solid economic growth in the December quarter, following a widely expected sharp contraction in the September quarter due to the COVID-19 lockdowns in NSW, Victoria and the ACT.

The central bank will lay out its expectations for the outlook and what scenarios the economy may face as restrictions ease in its latest quarterly statement on monetary policy later on Friday.

“By the middle of next year, GDP is expected to be back on its pre-Delta path,” Dr Lowe said following this week’s monthly board meeting.

“Our central scenario is for the economy to grow by around 5.5 per cent over 2022.”

The RBA had previously forecast growth of 4.5 per cent next year.

While the governor said it was possible the cash rate could rise in 2023, rather than in 2024 as previously thought, he was adamant financial markets had got it wrong expecting a rate hike in 2022.

Last week’s stronger than expected inflation figures, which pushed the key underlying measure to a six-year high of 2.1 per cent, sparked speculation of a rate hike sooner rather than later.

But Dr Lowe said this was a “complete overreaction”.

The RBA wants to see inflation sustainably within its two to three per cent target band before lifting the cash rate.

The bank’s latest forecast is that underlying inflation will be no higher than 2.5 per cent at the end of 2023.

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