Service sector activity contracts for the fifth consecutive month

Service sector activity is still contracting amidst tough operating conditions, according to the Bank of New Zealand - Business NZ Performance of Services Index (PSI).

The PSI for August stood at 47.9, down 1 point from July and the second lowest result since the survey began in April 2007. In addition, it was 11.5 points lower than the same month 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 54.2.

Business NZ Chief Executive Phil O’Reilly said comments from respondents highlight the key challenges facing the sector.

“A general lack of consumer confidence is keeping hands firmly in pockets when it comes to spending decisions. Also, businesses are keeping a closer watch on what they spend with some contracts ending up being cancelled. Others have found operations particularly difficult, with sales turnover at their lowest levels for some years and certainly nowhere near previous business activity.

“Also, the recent, persistent bad spells of weather throughout the country have made for a stronger than usual adverse seasonal impact. Hopefully, spring’s arrival will ease concerns for many businesses that are dependent on weather conditions.”

Bank of New Zealand Head of Research, Stephen Toplis, said the service sector was facing the burden of ongoing financing costs.

“Hopefully, the Reserve Bank's recent surprise slashing of the overnight cash rate will provide some respite. While ongoing credit-crunch problems will continue to raise the cost of funds to the banking sector – and this will be passed on – there is at least some hope that borrowing costs may now be approaching a peak.”

Although three of the five diffusion indices that make up the PSI showed expansion during August, the overall result was dragged down by a sharp drop in activity/sales (41.2). The previous lowest result for this index was June (44.9). Employment (48.1) also experienced contraction, but the August result was still the highest since March. Of the remaining indices, stocks/inventories (53.2) and supplier deliveries (51.3) went into positive territory for the first time since February and March respectively, while new orders/business (50.2) was largely unchanged during August.

Across the country, most regions remained in contraction. The North Island regions did not experience any significant change in activity from the previous month, with the Northern region (47.3) down 0.9 points from July, while the Central region (55.4) was up 0.5 points from July (largely due to strong sales/activity, employment and new orders/business). In the South Island, the Canterbury/Westland region (47.7) fell back into contraction after three months of slight expansion. Lastly, activity in the Otago/Southland region (39.3) remained similar to July, showing the lowest overall regional result for the fifth consecutive month.