Activity in the services sector was falling at a slightly slower rate in July, as the outlook for interest rates and the global economy remains uncertain, a private sector survey shows.

An increase in activity in discretionary spending areas such as accommodation, cafes and restaurants was not enough to offset weaknesses in retail and wholesale trade.

The Australian Industry Group/Commonwealth Bank Australian Performance of Services Index (PSI) rose 0.3 point to 48.8 points in July. A reading below 50 indicates contraction in activity.

On Tuesday, the Reserve Bank of Australia (RBA) kept its cash rate steady at 4.75 per cent, although most economists expect the interest rate to rise to at least five per cent this year.

Australian Industry Group chief executive Heather Ridout said the uncertainty over interest rates was weighing down the services sector.

Services businesses continued to experience mixed, and in the majority, soft trading conditions, Mrs Ridout said in a statement accompanying the survey report.

“While some are expressing enthusiasm about the flow on benefits from the resources boom, generally, the positive affects of the boom are being outweighed by consumer caution, interest rate concerns,” she said.

Commonwealth Bank senior economist John Peters said the PSI remaining below 50 shows a large chunk of the Australian economy was continuing to struggle.

“Consumer anxiety has translated into a sharp lift in savings as a share of disposable income to 11.5 per cent in early 2011,” Mr Peters said.

“Moreover, ongoing unsettling news from Europe and the US about their massive fiscal deficits and associated sovereign debt problems has further sapped both business and consumer confidence.”

The new orders sub-index was down 1.0 point at 49.3 in July.

The employment sub-index began to expand, rising 5.7 points to 51.1 in July, and inventories also turned around, rising 4.0 points to 51.6.

Sales of services across the sector fell 5.7 points to 45.9 in the month.

Only four of the nine service sub-sectors reported an increase in activity in July.