New Zealand's services sector contracts for fifth consecutive month - has seen only one month of 'minimal' expansion in the last 16; BNZ economists see 0.2% fall in GDP for June quarter

The services sector, which makes up about two-thirds of our GDP, contracted for the fifth consecutive month in June.

It follows a similar contraction in the manufacturing sector during June as well.

The BNZ – BusinessNZ Performance of Services Index (PSI) for June was 47.3 (A PSI reading above 50.0 indicates that the service sector is generally expanding; below 50.0 that it is declining). Although the June reading was 3.2 points up from May, after big plunge in that month, it was still well below the average of 52.9 over the history of the survey.

BNZ senior economist Doug Steel said while the headline PSI measure did lift from 44.1 to 47.3, every month it remains below 50 suggests service sector conditions are getting worse not better.

"The timeline for New Zealand’s long-awaited economic recovery just keeps getting pushed further and further out," he said.

The latest BNZ – BusinessNZ Performance of Manufacturing Index (PMI) that was released on Friday showed that New Zealand’s manufacturing sector also continued to show contraction during June.

The seasonally adjusted PMI for June was 48.8 (a PMI reading above 50.0 indicates that manufacturing is generally expanding; below 50.0 that it is declining). While this was up from 47.4 in May, it was not enough to see the sector climb out of contraction. The survey was also well below the average of 52.5 since it began.

Steel said another month of "soggy" PSI (47.3) and PMI (48.8) readings played a major part in the BNZ economists' decision to revise down their economic forecasts for the June quarter.

In BNZ's latest weekly Markets Outlook publication, issued separately, BNZ's head of research Stephen Toplis noted that the last few days "have seen a number of high frequency activity indicators support our view that not only did the economy stall in the June quarter but it is also struggling to gain momentum going into Q3".

"Indeed, so poor have these indicators been that we have lowered our expectation for Q2 GDP to -0.2%, from zero, and have made exactly the same adjustment for Q2 employment."

Toplis said key to this view is the ongoing weakness in both the PSI and PMI.

"While both nudged higher in the month of June they still, in combination, are consistent with an economy in recession. Both will need to push progressively higher if economic growth is to push towards the 2.5%+ rates of expansion that many folk are forecasting for the latter part of this year and into next."

BusinessNZ's CEO, Katherine Rich said that while the June PSI result saw most of the sub-index results display a higher value than the previous month, it continued the theme of ongoing contraction in a sector that has "only seen one month of minimal expansion over a 16-month period".

Last week the Reserve Bank left the Official Cash Rate on hold at 3.25% but strongly hinted towards a further cut at the next review in August and the central bank noted the softness of recent 'high frequency' economic data - which includes the PMI and PSI.

BNZ's Steel said this month’s combined PSI and PMI "is supportive of further easing and our expectation for OCR cuts in August and October to an eventual low of 2.75%".

He noted that New Zealand’s services sector "continues to underperform" compared with key trading partners.

"We remain the only country with a PSI below the breakeven 50 mark. Meanwhile across the ditch, the PSI in Australia lifted to its highest level in over a year at 51.8. While many of our trading partners will be equally as concerned about the impact of geopolitical conflict and trade tensions, at least they are starting on stable ground."