An improved performance from the services sector in July on top of the manufacturing sector returning to expansion indicates the economy may be picking up again from a mid-year slump

After a 'June swoon' New Zealand Inc seems to have experienced a 'never say die July', with tentative signs of an upturn again in economic activity.

The services sector, which makes up about two-thirds of our GDP, was still contracting last month - but it's gradually improving. And this follows on from the news at the end of last week that the manufacturing sector returned to expansion in July.

This could all be significant as the Reserve Bank has its latest review of the Official Cash Rate on Wednesday (August 20), at which it is widely expected to trim the OCR to 3.00% from the current 3.25%.

However, there's diverging opinions as to whether the RBNZ should keep cutting from their, with some economists arguing the OCR should go much lower, certainly to at least 2.5%, while others don't see that as necessary, given that, assuming there is a cut this week, some 250 basis points-worth of cuts will have been delivered in the past 12 months.

If the RBNZ sees signs the economy is starting to pick up it will be less inclined to keep cutting.

The BNZ – BusinessNZ Performance of Services Index (PSI) for July rose to 48.9 from 47.6 in June. While that's an improvement, it's still contraction. (A PSI reading above 50.0 indicates that the service sector is generally expanding; below 50.0 that it is declining). However, the index is now well above the 44.3 level it slumped to in May, although still well below the average 52.9 over the history of the survey.

BusinessNZ's CEO, Katherine Rich said that while the July result was a continued improvement from May level, "the sector has not experienced expansion for 17 consecutive months".

However, BNZ senior economist Doug Steel said "there are accumulating early signs of life in the economy".

And one of those came from the latest BNZ – BusinessNZ Performance of Manufacturing Index (PMI) that was released on Friday.

The seasonally adjusted PMI for July was 52.8, back into expansion, and up 3.6 points on the previous month.

Steel said as July’s economic indicators trickle in, "we are starting to wonder if the tide in the economy is turning".

"That is our forecast. However, it is good to start seeing some evidence," he said.

"To be consistent with the sort of economic growth we are forecasting, which is similar to the RBNZ’s expectations, the combined PMI/PSI activity indicator needs to lift to around 53. July’s 49.8 is a lot closer to that than was May’s 42.5. The RBNZ is widely expected to cut the Official Cash Rate (OCR) by 25 basis points to 3.0% at its decision on Wednesday. If the PMI/PSI activity indicator fails to move higher in the months ahead, it will increase the likelihood of more than one OCR cut," Steel said.