BusinessNZ-BNZ survey shows services sector weakest since October 2009

The services sector has joined the manufacturing sector in slowing markedly in the last month, the BusinessNZ-BNZ Performance of Services Index (PSI) has found.

The seasonally adjusted PSI fell 4.6 points in July to 50.5, its lowest level of activity since October 2009 and the second lowest July on record since the series began in 2007.

Last week the PMI survey of manufacturers found a similar slide in activity.

A measure above 50 suggests the sector is expanding, while anything under 50 suggests contraction.

"Today’s Performance of Services Index (PSI) has rained on the parade of last week’s retail sales figures, echoing the slowing PMI in the process," BNZ economist Craig Ebert said, adding however the outlook was not as bleak as some in the financial markets were suggesting.

"Is the NZ economic recovery fast losing friends? We don’t believe so. Indeed, there are probably dangers in being led by specific pieces of news right now, when there are still reasons to believe the broader outlook remains reasonably positive," Ebert said.

"A lot of the recent data have been unusually noisy, and therefore very difficult to trust. There were perhaps even greater reasons to downplay July’s PSI “weakness” than there was with the month’s PMI. For instance, it was peculiar to see the retail (40.5) and hospitality (43.8) sectors remaining big negatives, when we know the recent statistics on these particular sectors have been positive," Ebert said.

"This means the general view amongst analysts is that GDP advances at about 0.8% per quarter from here until the end of next year. While this is about what we think too, it is faster than what we presume for the economy’s (potential) speed limit over the period, meaning that, while growth won’t look fast, it will be increasing pressure on underlying inflation," he said.

"Seemingly at odds with this economic view, the financial markets would seem to have no qualms in pricing not much more than half a percent of upside to the cash rate over the next twelve months, which would leave the OCR not much higher than the “very supportive” level the RBNZ described the present 3% rate as."

Here is more detail from the survey below:

New orders/business (54.0) decreased 4.6 points, although remained in expansion for the 15th consecutive month.

Employment (51.2) returned to expansion levels experienced in May, while stocks/inventories (52.3) were the only sub-index to experience an increase for July.

Of those that declined, activity/sales (48.9) decreased sharply after an eight month period of expansion, while supplier deliveries (48.0) fell back after four months of slight expansion.

Unadjusted activity was mainly negative throughout the country. The Northern region (50.9) was the only one to show some expansion for July, although down 7.2 points from June. The Central region (43.3) dropped 8.3 points to its lowest level since the survey began, as activity and new orders/business decreased significantly.

In the South Island, both the Canterbury/Westland (46.2) and Otago/Southland (46.0) regions experienced an almost identical level of decline, although the later experienced a noticeable improvement on June.

Results for the various service sectors again displayed a range of results for July. At the positive end, transport & storage (56.6) followed up its June result with another solid level of expansion, while both property & business services and health & community services experienced an identical result of 50.3. In contrast, retail trade (40.5) continued its poor performance, while wholesale trade (48.0) experienced its first decline since October 2009.

Activity for firms by employment size showed the lackluster performance by the service sector was mainly due to micro-sized firms (1-10 workers) (41.4) experiencing a significant decline in activity for July. In comparison, all other firms by size experienced expansion for the current month, led by medium/large sized firms (51-100) (56.3) which remained largely unchanged in activity from June.

The fall in the level of expansion during July meant the proportion of positive comments received also fell to 40.1%, compared with 47.9% in June, 50.6% in May and 53.2% in April.