New Zealand's services sector expanded in July for the first time since March 2008, the latest BNZ-Business NZ Performance of Services Index (PSI) indicated. An increase of new orders over the month led the expansion, although this may be due to the seasonal effect of the end of winter, BNZ said.

The July PSI score of 50.1 from 45 in June indicated a very slight expansion in activity in the sector over the month. A score below 50 indicates contraction, while one above 50 indicates expansion.

"Just like we saw for New Zealand's manufacturing PMI last week, its service sector cousin, the PSI, continued to recover in July. Indeed, in climbing to 50.1, it achieved the point of stability that the PMI came so agonisingly close to grasping just before it," BNZ said.

"It wasn't thoroughly good news. The overall stability in July's PSI masked a very mixed performance in the details. For example, although the region of Canterbury/Westland hit 53.1, its neighbour Otago/Southland languished at 43.7. And while the retailing, wholesaling and transport industries looked much more stable, the likes of finance and insurance, communications and hospitality appeared to be going backwards," BNZ said.

The Northern region experienced an expansion with an index score of 51.2, while the Central region had 45.8, the same as in June.

Of the indices that make up the PSI, 'new orders' led the recovery with 56.5 in July following on from 50.8 in June. However, the big jump may be a seasonal effect as we come out of winter, BNZ economists said. The PSI is still a relatively new series and is not yet seasonally adjusted.

"However, if the much longer spanning PMI is anything to go by, the seasonal effect is probably not a big deal at this time of year (it's more of an issue toward the end of the calendar year). And so the PSI new orders index probably does signal genuinely higher production is in store," BNZ said.

The 'employment' index continued to contract, although at a slower pace than in June. This is still in line with expectations for unemployment to keep rising from 6% now to over 7% in 2010.