Australia's services activity continued to contract in March, but at a slower pace, results of a survey by the Australia Industry Group and the Commonwealth Bank showed Friday.

The group's seasonally adjusted Performance of Service Index increased to 35.6 in March from a low level of 32.2 in the previous month.

A reading above 50 signals an expansion in activity, while a reading below 50 signifies a contraction.

The AiG noted that although activity levels deteriorated in most sectors, the pace of the drop slowed in some sectors. Specifically, AiG said property and business service activities appeared to have benefited from a boost in the first homebuyers grants and cuts in interest rates.

However, the report said the latest reading on the index indicates that, confidence remains under siege from rising unemployment and an uncertain outlook for the domestic and world economy.

During the month, the sales index improved to 33.9, after touching a record low of 32.6 in February. New orders also increased, with the index moving up to 32.6 from 26.4. However, the employment sub-index declined to 36.2 from 37.9, to reach the lowest reading in the survey's six-year history.

Stock of goods contracted for the eleventh consecutive month, even as the index increased 9.4 points to 42.5. At the same time, supplier's delivery time fell at a slower pace. Input costs rose, but there was a fall in selling prices in March.

AiG's Chief Executive, Heather Ridout noted that conditions in the service sector remained overwhelmingly weak. Ridout said, The RBA and the OECD have confirmed that conditions will get tougher in Australia in the months ahead and this makes a strong case for a further reduction in interest rates.

The Commonwealth Bank's senior economist, John Peters also indicated that latest reading on the PSI gives room for the RBA to cut interest rates further in the next session to be held in this month. The economist said, The RBA will likely cut rates by another 1/2% to 2-3/4% in the next month or two, perhaps as early as next week after the April RBA Board meeting.

Meanwhile, the AiG's report on the Performance of Manufacturing Index released earlier in the week showed that the index improved to 33.4 in March from 31.7 in February, although manufacturing activity continued to remain weak.

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