Service sector activity improves in July

Service sector activity has improved slightly from its worst result in June, according to the Bank of New Zealand - Business NZ Performance of Services Index (PSI).

The PSI for July stood at 48.9, up 3.3 points from June and back to the level recorded in April. However, it was still down 6.3 points from the same time last year. A PSI reading above 50 indicates that the service sector is generally expanding; below 50 that it is declining. The average PSI value since the survey began is 54.6.

Business NZ chief executive Phil O’Reilly said although the PMI and now the PSI have shown some recovery during July, these two significant sectors of the New Zealand economy still find themselves in contraction mode.

“Looking at the positives in the service sector, new orders continue to remain above the ‘water level’ of 50 points, showing ongoing expansion that will flow through to general activity in the months ahead. Three of the four major regions showed some level of recovery, while Canterbury/Westland remains steady – albeit at a lower level than on average,” said Mr O’Reilly.

“It’s also interesting to see that the sectors providing positive influences on activity have also noted a distinct rise in activity compared with the same time last year. This shows that even in economically difficult times, some businesses are continuing to grow.

“On the flip side, many of the issues hampering businesses at present persist, with potential customers enquiring but often holding back from ordering, and the high cost of petrol limiting people’s additional cash for discretionary spending. Evidence of this can be seen in the retail sector, with four consecutive months of decreased activity.”

Bank of New Zealand senior markets economist Craig Ebert said the squeeze being felt by the service sector was highlighted by last Friday’s retail sales figures – which saw June quarter real retail sales fall for the second consecutive quarter, down 1.5 per cent.

“The third quarter looks set to be another tough one for the service sector. Of retailers, in particular, we wouldn’t be surprised to see real sales contract again.”

Four of the five diffusion indices that make up the PSI continued to exhibit decline, which has now occurred for four consecutive months. The improvement in the overall PSI result for July was mainly due to a recovery in activity/sales (47.9), employment (47.5) and supplier deliveries (48.2). Stocks/inventories (46.7) have remained very stable since April, with the difference between the highest and lowest value over the four month period only being 0.5 points.

Activity by region showed a split between expansion and contraction:

* For the two North Island regions there was a recovery from the June results, as the Northern region (48.2) increased 4.3 points from June, although still in contraction.
* The Central region (54.9) went back into expansion mode to record its highest level of activity since March (largely due to a boost in sales/activity).
* In the South Island, the Canterbury/Westland region (51.1) has remained steady in terms of activity, with the July result exactly matching that of June.