Australian tourism 'invasion' boosts NZ services sector

New Zealand's services sector expanded further in August from July as new orders jumped significantly, the latest BNZ Capital-Business NZ Performance of Services Index shows. The rise came following an "Australian invasion" that boosted the tourism sector. The August PSI showed a score of 51.3, the second month in a row in which activity in the sector expanded, after a score of 50.1 in July. A score above 50 represents an expansion of activity in the sector, while a score below 50 represents contraction. The Index's 'new orders/business' indicator rose further to 57.6 in August from 56.5 in July and 50.2 in August last year. "The first signs of spring, a jump in dairy prices, an active Government and heaps of Aussies seem to have been the recipe for further optimism in New Zealand's services sector in the month of August," BNZ head of research Stephen Toplis said.

As with many of the confidence indicators being released, the data come with the health warning that hard evidence of a recovery is now going to be needed to keep confidence headed in the right direction and, so far, such evidence is still sparse. Nonetheless, we do feel the data is yet further confirmation of our view that the recession is done and dusted, that activity levels have now stabilised, and a genuine pick up is set in place for calendar 2010. Of great importance, in this regard, is the fact that the PSI is mimicking other indices in suggesting that even the laggard labour market is starting to show signs of life. While the employment indicator still shows that a net majority of services companies intend to lay off further staff, the 49.3 reading is the strongest since February 2008 and well up on the 42.5 trough reported as recently as April. The combined impact of the positive factors that we have listed above should not be underestimated. Early August saw the first serious recorded jump in dairy commodity prices after a long string of heartbreaking falls. Agri-fax reports that its weighted average dairy price was 11.9% higher by the end of August than it was at the end of July. Perhaps more importantly, Fonterra's auction prices rose by more than double the Agri-fax measure and this is proving to be a good leading indicator of the eventually reported price. With further gains in the Agri-fax and auction prices since the PSI survey was put together there should be follow through in optimism in the regions. Of course, this is not to say that dairy farmers are out of the woods. Those who are highly leveraged still face severe cash flow constraints and significant balance sheet concerns as land prices tumble. Nonetheless, for those less pressured by debt constraints, the recent news should provide solace that the worst is behind them which, of course, is not only good news for the farmers themselves but also the service community that supports them. Given the impact that the dairy sector has on the southernmost regions of New Zealand, it is perhaps no surprise that the biggest jump in confidence was in Otago/Southland. One assumes that this boost was also supported by the fact that the South has been the beneficiary of a very good snow season and an influx of Australians. It may be a rarity for the average Kiwi to celebrate an Australian invasion but there is no doubt that New Zealand's tourism and accommodation industry would have looked much sicker than it has had our trans-Tasman colleagues not come here in droves over the winter. Importantly, there is now hope that the turnaround in the global economy will result in an uptick in more generalised tourism and we are hearing the first mutterings that forward bookings may be starting to pick up, albeit off extreme lows in many cases. One assumes that these factors are also being reflected amongst the increased optimism being expressed by the accommodation, cafes and restaurants sector more broadly. Anecdotal evidence would have us believe that central North Island businesses are benefiting from a flurry of Government and Government-impacted activity with consultants across a number of fields finding a number of opportunities to keep them busy as policy evolves. Last but not least, one assumes that the improvement being seen in the housing sector is being reflected in the reported pick up in property and business services, finance and insurance confidence. But all is not well everywhere. Consistent with the recently weak data coming out of the manufacturing sector, including the manufacturing PMI, and relatively soft retail sales data, we see businesses exposed to these sectors maintaining a relatively negative outlook. Retail, transport and storage feature in this regard. We are quick to note that the survey size for the industry groups is in many cases very small so the data are prone to compositional changes and severe volatility. Nonetheless, the overall survey and its component parts do fit with our priors that the economy, generally, is on the mend. Nonetheless, equally, it's a very mixed bag and New Zealand remains vulnerable to even the most modest of shocks.