Australia service sector slump deepens in July

SYDNEY, Aug 5 (Reuters) - Activity in Australia's services sector slowed further in July as high interest rates and rising energy costs depressed consumer and business confidence, a private survey showed on Tuesday.

The Australian Industry (AiG) Group-Commonwealth Bank Performance of Services Index (PSI) fell 2.6 points in July to 42.8, well below the 50 line marking the threshold between expansion and contraction.

The survey was the latest in a string of weak data and comes as the Reserve Bank of Australia (RBA) holds its monthly rate-setting meeting. The outcome, along with a brief statement, is due at 2:30 p.m. (0430 GMT).

All 21 analysts in a Reuters poll expected the central bank to hold rates at 12-year highs of 7.25 percent but there is speculation it could highlight growing risks to the economy and so open the door for an easing in the next few months. "The combination of the credit crunch, consecutive official and market based interest rate increases and high petrol prices are hitting services sales hard," said AiG chief executive, Heather Ridout.

"Weak readings for new orders, inventories and employment paint a less than rosy outlook for the sector in the months ahead," she added.

Perhaps most worrying was a sharp 6 point drop in the employment index to 42.2, a record low for the survey. The consumer-sensitive sectors of retail trade and personal & recreational services reported the largest declines. "The latest employment sub-index readings show that services firms are also re-evaluating their staffing requirements in light of the economic slowdown," said Ridout.

The labour market has been one of the most resilient parts of the economy and weakness here would greatly add to the case for cuts in interest rates. Official figures on employment for July are due on Thursday and analysts were already looking for only a marginal rise of 1,250 in the month.

The survey found activity contracted in seven of the nine sectors covered by the survey with wholesale trade recording the biggest fall followed by finance and insurance.

Activity also fell in transport & storage; accommodation, cafes & restaurants; and retail trade.