The services sector expanded slightly in January, as did the manufacturing sector - results that point toward an economic recovery later in the year

New Zealand's services sector, which makes up about two-thirds of our GDP, broke a 10-month run of contraction in January.

The BNZ – BusinessNZ Performance of Services Index (PSI) for January showed a 2.3-point rise from December to 50.4. (A PSI reading above 50.0 indicates that the service sector is generally expanding; below 50.0 that it is declining).

While that is a rise, the average reading through the history of this survey has been 53.1 - so, the current level's still well below that.

The rise in activity mirrors one seen in the latest BNZ – BusinessNZ Performance of Manufacturing Index (PMI) released last Friday, which snapped a  22-month run of contraction.

BNZ senior economist Doug Steel said the PSI rise "is consistent with stabilisation rather than elevation, but its latest move upwards is encouraging".

He said among the sub-indexes of the PSI, the employment index (47.1) was the only one to decline in January and remains the furthest below 50.

"It continues to suggest further contraction in service sector employment. This adds to a range of indicators showing New Zealand’s labour market is still deteriorating," Steel said.

"The unemployment rate rose to 5.1% in the December 2024 quarter from 4.8% a quarter earlier. Our economic forecasts are for the labour market to lag a pick-up in activity, such that the unemployment rate pushes a bit higher before peaking around 5.5%."

However, Steel said the latest PSI outturn is "reassuring that New Zealand’s economy may be at a turning point".

"Combining the PSI and PMI, the Composite Index (PCI) suggests an economic recovery later this year," Steel said.

"Our forecasts are for GDP growth of around 2.6% through 2025. But economic turning points are messy, and it can be difficult to determine the exact timing of the recovery. The recovery is unlikely to be in a straight line and indicators choppy."

Figures released shortly before Christmas showed that economic activity fell 1.0% in the September 2024 quarter as measured by gross domestic product. This followed a sharply revised down 1.1% fall in the June 2024 quarter.