Service sector expansion at snail's pace

Service sector expansion fell back to its lowest level of activity since October 2009, according to the BNZ - BusinessNZ Performance of Services Index (PSI).

The PSI for July was 50.5. This was 4.6 points down from June, and the second lowest July value since the survey began in 2007. 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 for 2008 was 49.1, while for 2009 it was 48.8. So far, the average score for 2010 is 53.9.

BusinessNZ chief executive Phil O’Reilly said that previous patchiness in service sector activity had now progressed further to deteriorating activity overall. While the main result was still on the positive side of 50.0, the strong decrease in activity/sales wiped any possibility of a better result.

“Unbundling the flat result for July shows that New Zealand’s smallest businesses are struggling the most, with across the board deterioration compared with other businesses by size. Also, increasing negative sentiments by businesses highlight customers keeping their hands in their pockets, leading to cash flow issues and uncertainty regarding future development options.”

Bank of New Zealand economist Craig Ebert said that despite today’s unwelcome PSI results, it doesn’t mean the broader recovery is over.

“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, for both New Zealand and the international economy.

“June quarter retailing was supposed to be soft, when in fact it expanded strongly in real terms and was nominally strong in June. The majority of the industry groups in the PSI maintained expansive positions in July, and while new orders slowed, they remained positive.”

Three of the five sub-indices were still in expansion mode in July. 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.