Activity in NZ's services sector has improved, but still remains at contractionary levels, while manufacturing has moved further into contraction

New Zealand's services sector - which makes up about two-thirds of GDP - has seen its highest level of activity since February, but still remains in contraction.

According to the BNZ – BusinessNZ Performance of Services Index (PSI) for November, the index rose 3.3 points from October to 49.5. (A PSI reading above 50.0 indicates that the service sector is generally expanding; below 50.0 that it is declining).

However, the November result was still well below the average of 53.1 over the history of the survey.

BusinessNZ's CEO, Katherine Rich said that the November result was the highest since February 2024, with some encouraging signs. The two key subindices of Activity/Sales (48.6) and New Orders/Business (49.8) remained in contraction, although both were also at their highest level of activity since February. The Employment Index (46.8) rose 0.4 points from September, while both Stocks/Inventories (52.2) and Supplier Deliveries (52.2) were at their high levels since January 2024 and July 2023 respectively.

BNZ senior economist Doug Steel said the November result "is another case of things getting less bad before they get good. The direction of change is encouraging, but it’s important to remember the PSI remains well below its long-run average of 53.1".

But while the PSI improved, the November result for the Performance of Manufacturing Index, released on Friday, showed that the manufacturing sector has been contracting for 21 consecutive months.

The November PMI result also showed a loss of the small amount of momentum built in the past few months, with the index level hitting its lowest level since July 2024.

The PMI reading  was 45.5 in  November, down from 45.7 in October. Again, like the PSI, a reading above 50 indicates an expansion, below 50 a contraction.

BusinessNZ’s Director, Advocacy Catherine Beard said that "any momentum built over the July-September period has now reverted back to a retreat for the sector".

"The key sub-index result for Production (42.5) fell another 1.5 points from October to be at its lowest level of activity since June 2024, while New Orders (44.8) fell back 3.7 points to be at its lowest result since July 2024. Employment (46.9) has remained within a tight band of contraction for the last four months, while both Finished Stocks (49.3) and Deliveries (49.9) improved."

Steel said that the main message of a manufacturing sector still under significant pressure remains.

"Recent business surveys report that manufacturers are feeling more confident about the outlook, but there is scant evidence of a general turnaround in activity to date," he said.

Steel said the Composite Index (PCI), which combines the PSI and the Performance of Manufacturing Index (PMI), suggests GDP is still tracking below year earlier levels.

"The lift in the PSI has been tempered by further contraction in the PMI. We anticipate this week’s Q3 GDP figures [out on Thursday] to show a decrease of 0.4% for the quarter.

"Our economic forecasts are for growth to be broadly flat in Q4 before starting to improve in 2025. The impact of interest rate cuts to date is more one of stabilisation than elevation."