Activity in New Zealand’s services sector 'inched its way higher' during August

New Zealand Inc appears to be very slowly picking itself off the floor after around two years of rolling recession - but the emphasis is on 'slowly', according to the latest surveys on the service and manufacturing sectors.

The latest BNZ - BusinessNZ Performance of Services Index (PSI) for August released on Monday "inched its way higher" and showed a 0.3 point monthly rise to 45.5. While that's an improvement, the fact is a reading above 50 shows the sector is expanding - but anything under 50 shows contraction. So, it's still contracting. And the services sector accounts for around two-thirds of GDP.

BusinessNZ’s Director, Advocacy Catherine Beard said despite two consecutive months showing a lift in activity levels, the key index value for Activity/Sales (43.9) remains lacklustre, while New Orders/Business (46.6) dipped slightly from July. On a more positive note, Employment (49.2) lifted to its highest result since March.

The proportion of negative comments from survey respondents for August stood at 60.8%, which was down from 67.0% in both July and June.

"Respondents continued to note the high cost of living and general economic conditions as reasons for ongoing tough times," she said.

BNZ Senior Economist Doug Steel said that "smoothing through monthly volatility, the PSI’s three-month average remains deep in contractionary territory at 43.9. The PSI has been in contraction for six consecutive months which is the longest continuous period of decline since the GFC".

The latest news from the services sector follows on from Friday's release of the BNZ –BusinessNZ Performance of Manufacturing Index (PMI), which similarly showed some incremental improvement - but again from dire levels.

Both surveys are indicating that activity might have bottomed out in June, when results for both surveys were dire indeed.

When cutting the Official Cash Rate from 5.5% to 5.25% on August 14 the Reserve Bank (RBNZ) noted that "a broad range of high-frequency indicators point to a material weakening in domestic economic activity in recent months".

GDP figures for the June quarter are being released on Thursday (September 19) and are expected to show a contraction in economic activity. The RBNZ has forecast a 0.5% decline in the GDP for the quarter, while other major bank economists also expect a drop, but a smaller one. The RBNZ's also forecast a fall in GDP in the current September quarter.

Back on the PSI, BNZ's Steel said the latest PSI number was better than June’s "truly awful" 41.0 reading, but continues to reflect "extremely challenging conditions for the services sector".

He said the PSI retail trade index increased from 31.8 to 36.8 in August "but remains the weakest PSI industry".

"Official figures show that retail sales volumes have decreased in 9 out of the last 10 quarters through to Q2 this year. Our economic forecasts are for retail sales volumes to be flat in Q3, remembering that the current starting point remains very weak.

"The outlook is a contest between the likes of income tax relief and interest rate reduction on the positive side and a deteriorating labour market and subdued housing market on the negative. Lower fuel prices will also provide some support to the purchasing power of household disposable income," Steel said.

Joining together the PMI and PSI, the combined results (called the BNZ-BusinessNZ Performance of Composite Index, or PCI) imply ongoing economic weakness," Steel said.

The BNZ economists are picking a 0.4% contraction in the June quarter GDP figures.

"Consistent with our economic forecasts, the weakness for the PCI in August suggests that contraction is likely to continue into Q3. More encouragingly, while still well below 50, the PMI and PSI activity components add to a host of economic indicators that have become at least less negative over the past month or so," Steel said.