Weakening of service sector activity continues in May

Activity in the service sector lifted slightly in the last month but remains in a weak state, according to the Bank of New Zealand - Business NZ Performance of Services Index (PSI).

The PSI for May stands at 49.1. Although this is 0.2 points up from April, it was 9.4 points lower than the same time last year. A PSI reading above 50.0 indicates the service sector is generally expanding; below 50.0 that it is declining. The average PSI value since the survey began is 55.7.

Business NZ chief executive Phil O’Reilly says the latest result is a mixture of positive and negative news.

“It’s encouraging to see the index has not shown a worse result than April and that the Northern and Canterbury/Westland regions have improved to show minor expansion.”

Although some sub-sectors are continuing to show moderate growth, the May result was still the second lowest result recorded and significantly down on the same time last year. Mr O’Reilly says comments from respondents clearly highlight the impact of the slowing economy as spending is down while costs are up.

“Looking at offshore developments, it’s pleasing to see the latest JPMorgan global PSI for May (52.4) showed slight acceleration in activity and new business picking up. While conditions remain soft offshore, a halt in the decline in overseas markets should provide a similar steady pattern of activity in New Zealand in the months ahead.”

The Bank of New Zealand’s senior markets economist, Craig Ebert, said the strong declines in the retail sector warn of a recession taking hold through the wider economy.

“Last Friday’s retail figures confirmed in our minds that underlying activity is not just moderating, but going backwards at an increasing rate of knots. And today’s Performance of Services Index would seem to back this up, with its retail trade and hospitality categories clearly remaining the weakest links.”

Four of the five diffusion indices that make up the PSI exhibited some level of decline, with activity/sales (48.3) showing its first contraction. Employment (44.7) followed on from its decrease in March, while stocks/inventories (46.9) and supplier deliveries (47.8) also recorded some level of contraction. In contrast, new orders/business (55.3) picked up from March, but at that level still represents its second worst result.

Activity by region showed most near the ‘no change’ threshold. Both the Northern (50.8) and Canterbury/Westland (50.6) regions improved from April, while the Central region (50.5) continued to fall to its lowest level recorded. The Otago/Southland region (41.6) continued to experience a significant weakening, mainly due to ongoing falls in activity/sales.

The various service sectors recorded a mix of expansion and contraction during May. At one end, both the health & community services (56.8) and property & business services (56.1) displayed healthy growth in May, however, accommodation, cafes & restaurants (36.1) continued to fall, while retail trade (46.1) also experienced another decline in activity. Wholesale trade (51.2) bounced back from the April result to show some level of expansion.