While service sector activity recovered a little last month from the 'horrendous' June results, the Performance of Services Index is still below the levels seen during the Global Financial Crisis

In June we got "horrendous" - for July we've got "a bit less awful".

That's the outcome from the latest BNZ – BusinessNZ Performance of Services Index (PSI), which showed the index rising from 40.7 in June to 44.6. However, anything under 50 shows that the sector is actually declining. BNZ senior economist Doug Steel said the index rise in July was "a half hearted bounce and it remains incredibly weak".

The services sector makes up about two-thirds of the country's GDP.

The PSI release on Monday follows on from Friday's release of the July factory Performance of Manufacturing Index, which Steel characterised as "only a little bit less dreadful" than the reading that index had in June. 

And both releases follow the Reserve Bank's decision to cut the Official Cash Rate to 5.25% from 5.5% last week and the release of its latest Monetary Policy Statement, in which the RBNZ forecast that economic activity will have contracted by 0.5% in the June 2024 quarter and will contract a further 0.2% in the current September quarter.

Business NZ chief executive Kirk Hope said BusinessNZ chief executive Kirk Hope said that while the relative improvement in service sector activity for July was "a welcome sight" after "horrendous" June result, there's still a lot of work to go before the sector is back on track.

"The key index values for Activity/Sales (39.1) still remains under the 40-point mark, although New Orders/Business (45.3) did show a marked improvement compared with June, albeit off a very low base.

"Despite the relative positive progress of the July result, the proportion of negative comments for the month (67.0%) was the same as June. Respondents noted the cost of living and interest rates as two key determinants for the current tough economic times," Kirk said.

Steel said to give some perspective on how challenging the current environment is for service sector firms, "it’s notable the increase in the PSI does not even get the index back to the level it was during the depths of the GFC back in 2008/09".

Steel said the service sector weakness was widespread and in fact non-seasonally adjusted PSI readings were sub-50 across all groupings whether it be by firm size, by region, or by industry.

"All industries below 50 in the same month has never occurred before outside of Covid lockdowns. It fits with demand restraint from all comers whether it be from business, government, tourists, new migrants, or households.

"While the degree of indicated contraction in the PSI varies across industries, retail trade continues to stand out on the downside. Not only was its unadjusted 31.8 in July the lowest among industries in the month, but it was that industry’s worst July result since the PSI survey began – and by quite some margin. Accommodation, cafes, and restaurants also recorded its lowest ever July PSI, at 34.1."

Steel said joining the weak PSI "with a similarly weak PMI reading from last week", gives a combined index (PCI) indicating ongoing economic contraction.

"Our forecasts already show near term GDP weakness. The limited bounce in both the PMI and PSI in July adds to the case. We, thus, tab down our Q3 GDP estimate to -0.3% from flat. Whatever the precise figure, which will also depend on how weak Q2 is, the main message of activity under pressure remains," Steel said.