Activity in the Australian services sector contracted in October as sales weakened and new orders fell, a private survey shows.
The Australian Industry Group/Commonwealth Bank Australian Performance of Services Index (PSI) fell 1.5 points to 48.8 points in October.
A reading above 50 indicates an increase in activity.
Australian Industry Group (Ai Group) chief executive Heather Ridout said the weakness in the services sector reinforced the Reserve Bank of Australia's (RBA) decision to cut interest rates.
"While there are some signs that business spending may be gradually recovering, consumers clearly remain tentative and flat conditions persist across much of the economy," she said.
Commonwealth Bank senior economist John Peters said the PSI reflected the patchy nature of the Australian economy and the negative impact of the strong Australian dollar.
"Consumer and business confidence continues to be sapped by the sovereign debt turmoil in Euroland. In particular, consumers remain very cautious about the future," Mr Peters said.
Mr Peters said the RBA's interest rate cut from 4.75 per cent to 4.5 per cent on Tuesday should give the services sector some hope.
"It should provide some boost to household and business confidence and to struggling segments of the economy including the services sector," he said.
"In 2012, we see local GDP (gross domestic product) growth picking up to near four per cent due to the stellar terms of trade and the robust mining investment boom which has a long way to run yet.
"Such an outcome is likely to drive jobs growth and push unemployment lower, a labour market outcome that should help lift consumer spirits and spending activity," Mr Peters said.
Four of the nine service sub-sectors reported an increase in activity in September, with finance and insurance posting the strongest growth.
