Weakness continues in the service sector

The service sector remains weak, dropping to its second lowest result since the survey began, according to the Bank of New Zealand - Business NZ Performance of Services Index (PSI).

The PSI for September stood at 46.9, down 1.0 point from August and the second lowest result since the survey began in April 2007. In addition, it was a substantial 12.1 points from the same month last year. A PSI reading above 50.0 indicates that the service sector is generally expanding; below 50.0 that it is declining. The average PSI value since the survey began is 53.8.

Business NZ chief executive Phil O’Reilly said that the main index values showed there is likely to be more of the same in terms of a downturn in activity for some months to come.

“Activity/sales for the last two months have shown fairly poor results, and nowhere near activity during the same period last year. In addition, new orders/business slipped into slight contraction for the first time. This does not bode well for activity during the last quarter of 2008, which for many service sectors is the prime period for sales leading into Christmas.

“Comments from those businesses struggling are squarely centred on the general economic downturn, as well as a lack of confidence with consumer spending. There are also more comments filtering through regarding cash flow issues, while positive comments have been focused on better weather conditions improving sales.”

Bank of New Zealand Head of Research Stephen Toplis said the outlook for the economy was continuing to deteriorate but inflationary pressures were reducing.

“By September of next year, we believe annual inflation will be back within the Reserve Bank’s target band on its way to a sub 2% low.”

Mr Toplis said the Reserve Bank now has the green light to push interest rates aggressively downward but he cautioned businesses that they should not expect lending rates to fall by the same magnitude.

Deterioration in the economy showed up in September’s PSI, with four of the five diffusion indices contracting during September. Activity/sales (43.9) continued to show a weak result. Employment (45.8) also remained weak, with contraction now continuing for seven consecutive months. September also saw for the first time new orders/business (49.4) going under the no change level of 50.0, indicating difficult times may continue for some time yet. Of the other diffusion indices, stock/inventories (53.0) remained similar to August, while supplier deliveries (45.6) went back into decline.

Activity by region showed a largely similar pattern to previous months. The Northern region (46.5) continued to slip slightly, with its second lowest result. The Central region (52.7) also experienced a dip from August, but remained in positive territory for overall activity. In the South Island, the Canterbury/Westland region (50.9) recovered somewhat from contraction in August, while the Otago/Southland region (37.0) plunged further into contraction from August, but not quite at the levels experienced in June.

Link to time series data