Activity in New Zealand's services sector - which accounts for about two-thirds of the country's GDP - has plummeted, according to a long running survey.
The BNZ – BusinessNZ Performance of Services Index (PSI), which has been going since 2007, recorded the lowest level of activity for a non-COVID lockdown month since the survey began.
An index level below 50 shows a contracting services sector, above 50 shows it is expanding. The latest monthly result was 43 - down some 3.6 points in a month.
It is further evidence that the Reserve Bank's efforts to stamp out inflation are really starting to have a deadening impact on the economy.
While the March quarter GDP results are due to be released this week and it's a coin-toss whether they will show a contracting or (slightly) expanding economy, this services sector index reading potentially has very bad portents for the GDP outcome in the June quarter, which finishes in under two weeks.
"There is weak and then there is very weak," BNZ senior economist Doug Steel said.
He said the latest index reading is lower than the 44.9 low reached during the Global Financial Crisis.
"This tells of a services sector in reverse, at pace," Steel said. He said the latest index reading "extends a rapid decline from February’s ok looking 52.4".
"The speed of decline is as worrisome as its size over the past three months."
BusinessNZ chief executive Kirk Hope said the May result "was as bad is it can get for the sector", reaching contraction levels greater than during the Global Financial Crisis of 2008-09.
Steel said all major Performance of Service (PSI) components fell in the month. This puts them all further and "significantly below average".
"Activity/sales was the weakness in May on an outright basis, at 40.9. That is a massive 13.6 index points below its long-term norm, a comparison only surpassed by the new orders/business indicator that slumped to 42.6 and some 14.5 index points below normal. Demand has slumped," he said.
"Most industries are in retreat, with retail’s PSI 33.8 the weakest of all and its lowest ever May result. As one PSI respondent put it, ‘sudden drop in sales’ and ‘average order volume down significantly’. Another noted ‘Redirection of the products customers are buying. Lower value products have higher demand’.
"This sentiment fits with last week’s electronic card transaction data for May. The seasonally adjusted data saw the value of retail transactions drop 1.1% m/m, to be down 2.6% on a year ago. The average value of a transaction was 2.2% lower than a year earlier," Steel said.
He said this all suggested "downside risk" to second-quarter GDP.
Steel said combining the "very weak" PSI with last week’s "soft" Performance of Manufacturing Index yields a composite index "that points to GDP falling by more than many might care to believe".
"Even if this week’s Q1 GDP figures manage something near zero as we think on an annual basis, the PSI and PMI indicators suggest a larger negative than we already anticipate for Q2.
"They raise the risk of significantly weaker annual GDP growth in Q2 than that published in the RBNZ’s May MPS [Monetary Policy Statement]," Steel said. The RBNZ has forecast that GDP will grow by 0.1% in the June quarter.
"NZ’s PSI and PMI also look weak relative to elsewhere. Indeed, both local indicators are lower than their equivalents across the major comparators we look at like in Australia, China, Europe, Japan, UK, and the US," Steel said.
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