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."
24 Comments
How perplexing? Especially when your economic understanding tells you that falling interest rates lead to economic recovery.
What an earth could be causing the economy to continue contracting against all expectations? This feels eerily like a repeat of last year.
After the 2024 May budget with large cuts to government spending, public sector layoffs and lower taxes NZ economists were predicting strong growth and rising house prices by the end of the year. What went wrong?
Not dropping interest rates quickly enough?
What went wrong?
You might find the answer in 'credit impulse,' the macroeconomic indicator that measures the annual change in new credit issued as a percentage of GDP.
But does the govt committing to building the world's biggest skateboard park mean 'economic recovery'? Sure it employs people - you could even have a small army of consultants on $500K pa for a feasibility study. It's all quite subjective.
I'm being a bit facetious - I know why the economy has contracted and so do Treasury and the RBNZ. Sudden and unplanned reductions in government spending and investment have created a demand shock - the building sector in particular has felt the full force of this. It's possible this was a deliberate move to slow down house supply to protect elevated prices. But it has rippled out across the entire service and manufacturing sectors.
But it has rippled out across the entire service and manufacturing sectors.
Aotearoa is not a manufacturing economy and I doubt it ever will be going forward. As for services, let me suggest that the Ponzi is where the cream is for service providers. And of course, services to public sector - which in many cases is either a rort and high cost to taxpayers.
Okay - so this is the question I always have to ask when confronted with the idea that removing jobs and businesses (the ones that provide services) from the private sector helps the economy? Which is what really happens when the government cuts spending and lays off public sector workers.
Are we better off now that thousands of public sector jobs no longer exists? Has the construction sector and the thousands of tradies and apprentices who lost work, benefited from significant cutbacks to house building, maintenance contracts and infrastructure?
Okay - so this is the question I always have to ask when confronted with the idea that removing jobs and businesses (the ones that provide services) from the private sector helps the economy?
If we use the example of Greece, we know that everything was hunky dory until the GFC when pvte sector revenues collapsed and the govt lost control of public finances. We also know that as a member of the Eurozone, Greece could not devalue its currency or independently adjust monetary policy to respond to the crisis, limiting its ability to manage debt and stimulate growth.
Some of the public sector excesses were stark:
Bonuses for Routine Activities: Public employees received bonuses for simply showing up to work on time, using computers, or speaking foreign languages - activities considered standard in most organizations.
“Attendance” Bonus: Civil servants were paid extra just for being present at their workplace, regardless of performance or productivity.
Inheritance of Pensions: In some cases, unmarried daughters of deceased civil servants continued to receive their fathers’ pensions, regardless of their own financial status.
Bloated Workforce: The Greek public sector employed an excessive number of staff, often with overlapping or redundant roles, leading to inefficiency and inflated wage bills.
Patronage and Clientelism: Political patronage led to the hiring of unnecessary personnel, further straining public finances without improving service delivery.
Procurement Irregularities: Fragmented procurement, lack of transparency, and corruption have led to overpriced contracts and misallocation of public resources, especially in areas like health and infrastructure.
Lack of Monitoring and Accountability: Weak oversight and absence of performance measurement allowed wasteful practices to persist unchecked.
Complex Bureaucracy: Opaque, fragmented governance and overlapping responsibilities resulted in slow, costly, and ineffective public service delivery.
Oh my. Thank you for posting this.
Sounds like a gd gig where do I apply?
I have visions of Gliding On after reading that.
Are you better off paying lower taxes when unemployment is rising towards 6%? Or higher taxes and unemployment falling towards 3%?
I believe higher taxation will be demanded of the public regardless. While I appreciate the govt can simply add to the budget and say they'll fund massive healthcare and pension costs among other things, they will want more cancelled via taxation to justify it without stoking inflation, and as such over time we will see this imposed via various increases and implementations of taxes to attempt to do so. We are a trading nation tied to credit expansion and the value of our currency, we cannot afford to devalue our currency too much given our reliance on imported goods.
What an earth is causing this sustained contraction in NZ's private sector? Interest rates are falling, there is less government spending, taxes are lower and exports are up. Home building has fallen which should be lifting prices but isn't.
This makes no sense? How are the smartest economists in NZ getting it wrong over and over again? Every growth forecast ends up being wrong.
The economic contraction would be even greater if it were not for lower interest rates.
We are still rebounding from the economy being unduly puffed up earlier this decade.
The economy lacks an engine for significant sustainable growth.
KeithW
We are still rebounding from the economy being unduly puffed up earlier this decade.
Arguably much longer. Reality is that you reap what you sow. Chickens coming home to roost?
[Enough of the pastoral cliches for now]
I asked ChatGPT if NZ has entered a low-growth trap. Here's the reply:
Signs NZ Is Already in a Low-Growth Trap:
Persistently weak GDP growth Yes — Q2 forecast between 0.0–0.3%, following weak 2024
Stagnating services sector Yes — consistent contraction across services since early 2024
Falling private investment Yes — business investment down, hiring intentions weak
Weak employment growth Yes — employment is flat, emigration easing pressure artificially
High interest rates suppress demand Yes — OCR remains elevated at 3.25%, mortgage pressure persists
Tight fiscal policy Yes — government cutting spending into a downturn
Declining population/migration shift Yes — net outflows of workers to Australia/UK
Low business and consumer confidence Yes — reflected in weak hiring, flat retail, and falling services
All indicators are flashing amber or red.
So Is NZ Already in a Trap?
Yes — or at the very least, it is on the threshold.
There is a compelling argument that New Zealand is already in the early phase of a low-growth trap:
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Aggregate demand is weak
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The private sector is not investing
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The government is pulling back spending
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Productivity remains stagnant
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Key sectors (services, construction, retail) are not recovering
And crucially — there is no obvious engine of growth stepping in to reverse the trend.
Traps. Aging population without retaining younger skilled workers.And....to much overall debt.
The engine has lost a cylinder HOUSING and is spluttering and blowing blue smoke
Interesting NAct stopped talking privatisation
The only way out is QE
Excessive QE is where we got into this situation five years ago
KeithW
and back in 1992... its a cure all, until it is not
We aren't doing a very good job of bringing money into New Zealand. For example - our universities have capacity (notable exception: Canterbury), Australia is full and the USA has turned weird towards foreign students. NZ should be screaming from the rooftops that we are a great place to go to school.
We only got the 2nd tier dregs looking for a work visa... be honest
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