Activity in NZ's services sector contracted further in December, matching a more contractionary performance in the month from the manufacturing sector as well

New Zealand's services sector, which makes up about two-thirds of our GDP, contracted further last month after showing signs of life in November.

According to the BNZ – BusinessNZ Performance of Services Index (PSI) for December, the index dropped 1.2 points from November to 47.9. (A PSI reading above 50.0 indicates that the service sector is generally expanding; below 50.0 that it is declining). The average reading through the history of this survey has been 53.1 - so, the current level's well below that.

This fall in activity mirrors one seen in the latest BNZ – BusinessNZ Performance of Manufacturing Index (PMI) released last Friday. According to this index the manufacturing sector has been in contraction for some 22 months.

BusinessNZ's chief executive, Katherine Rich said that the services sector has now been in contraction for 10 consecutive months, which has meant "a tough 2024 for those businesses trying to keep their heads above water during the wider economic recession".

BNZ's senior economist Doug Steel said that "comparing across our key trading partners, New Zealand has the only PSI in contraction. Our neighbour Australia is the closest comparison, but their equivalent PSI is sitting more comfortably at 50.8”.

Steel said contrasting economic fortunes between the US and NZ economy were a key driver of another hefty fall in the New Zealand dollar in December.

"Results well below 50 in NZ for both the PSI and the Performance of Manufacturing Index (PMI) continue to highlight broad-based weak demand."

Steel said combining the PSI and the PMI, the Composite Index (PCI) suggests "some downside risk to our near-erm growth forecasts".

"Historical revisions show GDP was slightly better over 2023 and early 2024 than previously assumed. However, they also show a faster deterioration in Q2 and Q3 2024 than expected. The updated data better matches the weakness observed in our PCI indicator across the middle of 2024. Economic turning points are messy. While some indicators (e.g. business confidence) are suggesting a turnaround, others like the PCI suggest that it could take some time for it to feel like a recovery," Steel said.

Figures released shortly before Christmas showed that economic activity fell 1.0% in the September 2024 quarter as measured by gross domestic product. This followed a sharply revised down 1.1% fall in the June 2024 quarter. The figures from Stats NZ seemed to more accurately mirror than previously the precipitous drop in activity during the middle of the year that was, until the revised GDP figures were issued, more visible in lower tier high frequency data.