The Australian services sector is back in contraction mode following a temporary bounce, amid concerns over the economy and upcoming federal and state budgets.

The Australian Industry Group’s performance of services index recorded its first expansion in two years in February, jumping to 55.2 – above the 50 level that separates expansion from contraction.

But the sector was back in negative territory in March with the index falling 6.2 points to 48.9.

Sales dropped significantly, while employment also contracted, indicating employers are cautious about the near-term outlook, the report said.

“Concerns over the economy and uncertainty around spending cuts in state and federal budgets were cited as impacting demand for services in March,” the report said.

Ai Group chief executive Innes Willox said the disappointing result was a sober reminder of the economy’s fragility.

“(This) is a further reminder of the risk that excessive spending cuts in the upcoming budget could slow down domestic activity rather than encourage the private sector investment and employment creation that the economy requires,” Willox said.

Feedback from businesses suggested consumers were still cautious about retail spending, especially in the non-food and non-essential categories, the report said.

But there was growth in health and community services, finance and insurance services, and personal and recreational services.