Activity in the services sector - which makes up about two-thirds of our GDP - slumped again last month, suggesting that the anticipated pick-up in economic activity is struggling to get traction after a stall in growth in the June quarter.
The BNZ – BusinessNZ Performance of Services Index (PSI) for August fell to 47.5 from 48.9 in July and moved deeper into contractionary territory. A PSI reading above 50.0 indicates that the service sector is generally expanding; below 50.0 that it is declining.
The service sector results mirror those from the latest BNZ – BusinessNZ Performance of Manufacturing Index (PMI) that was released on Friday. The seasonally adjusted PMI for August was 49.9. This was down 2.9 points from 52.8 in July and below the average of 52.5 since the survey began.
June quarter GDP figures due to be released on Thursday are expected to show that our GDP contracted again during the quarter, but expectations - and some high frequency data - have suggested a pick-up is now happening in the September quarter.
The expectation of a pick up has been given further fuel by the Reserve Bank last month dropping the Official Cash Rate from 3.25% to 3.00% and indicating the rate may be dropped further to 2.5% by the end of the year.
However, neither Friday's PMI, nor the PSI - released on Monday - have chosen to follow the narrative.
BusinessNZ's CEO, Katherine Rich said that the service sector "has now endured tough times for a year and a half, representing a very difficult period for many".
She said service sector businesses reported "widespread pressures from inflation, high interest rates, cost-of-living impacts, and weak consumer confidence, all contributing to reduced demand and spending".
Other concerns included seasonal slowdowns, rising operating costs, supply chain disruptions, and government policy uncertainty.
BNZ senior economist Doug Steel said that across the economy, he still believed the general signs of a "turning point" are there.
"However, there is a very real risk any ensuing bounce takes longer than currently expected."
Steel said this means "that the balance of risk to our interest rate forecasts (by a slim margin) is that the OCR) may need to go lower than the 2.50% we have forecast".
He said BNZ economists had "pencilled in" a forecast 0.5% contraction for second-quarter GDP data being released on Thursday.
"While we lowered our Q2 estimate, we also lifted our pick for Q3 (from +0.5% to +0.7%). Looking ahead, the combined PMI and PSI activity indicator (46.4) suggests the pace of our forecast recovery may be too optimistic. Indeed, it would need to jump up to around 53 to be consistent with our year-end GDP forecast."
12 Comments
This has all the hallmarks of an overshoot. Further negative economic news later in the Spring spooks the RBNZ, the OCR drops to 2%, the $NZ drops to US50c, exports take off like a rocket, economic activity swings in to crazy positive territiory, house prices take off, another asset bubble forms, the $NZ goes up into the high 60s, the RBNZ raises the OCR to 6%, exports plummet, the housing bubble bursts, economic activity tanks - rinse and repeat.
I'm wondering at this point if the sluggish economic activity isn't also induced by fear, driven by the austerity measures of this government on one hand, and by the craziness happening in the US on the other
I'm starting to believe it's not a numbers' crisis as much as a vote of non confidence in the governing parties, which do their darnedest to show they only care about their mates' profits, disregarding the economy's health
After all, long term prosperity correlates strongest with confidence in the government and the country's stability. Both the NZ and the US governments are acting haphazardly and destabilizing the status quo
So I start to think the economy will pick up when our government starts showing some signs of competence, goodwill and stability, no matter what the number posted on the RBNZ wall is saying
- edit - the quote on the bottom of this page is now "Monetary policy is not a panacea. ~ Ben Bernanke". Quite serendipitous
I had a discussion with Chat GPT about the this re-occurring headline - above - predicting recovery in the NZ economy. And how the continuing economic contraction in key sectors is somehow a sign of recovery.
Me:
Given that NZ economists have had to consistently downgrade their fore-casts for the passed two years what do you think they are missing from their models and thinking?
Chat GPT:
NZ economists have systematically overestimated private sector resilience and underestimated the drag from fiscal tightening. Their models are still too anchored in the idea that monetary policy is the main lever and that once inflation drops, recovery naturally follows.
An MMT perspective flips that:
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Recovery doesn’t come “for free” with lower inflation — it comes from sufficient net spending power in the economy.
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If the private sector wants to save and the government is cutting back, then weak demand is the logical outcome.
👉 So, the repeated downgrades are not just bad luck — they reflect a structural blind spot in mainstream NZ forecasting: not treating fiscal stance and sectoral balances as central drivers of growth.
That's right on the money. The combination of high interest rates, increased private sector savings, and steep declines in Govt spending has been the perfect storm for tanking economic activity.
That AI is pretty smart, clearly no NZ Economist is using it.
Me: Given the above what is a more realist outcome for the NZ economy next year?
Chat GPT:
✅ MMT-Informed “Realistic Outcome”
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GDP: 0–1% growth, with risk of minor contractions in quarters.
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Unemployment: ~4.5–5%, possibly sticky in services sectors.
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Inflation: easing gradually, ~3–4%.
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Private demand: weak, with continued desire to save/deleverage.
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Fiscal requirement: active stimulus needed to sustain recovery.
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Monetary policy: supportive but insufficient alone.
Bottom line: NZ next year is likely to see sluggish, uneven growth rather than a smooth rebound. The economy may feel like it’s limping forward, with slack in labor and capital persisting unless the government steps in decisively to support aggregate demand.
This response is less accurate IMO. It doesn't pay any attention to our primary industry (Dairy, Beef, Sheep, Tourism etc) that's currently experiencing huge expansion with near record prices for Milk, Beef, Lamb. Combine this with a further weakening dollar and this will only pour petrol on the fire of GDP growth. This will drive economic growth to near-record levels in 2026 and beyond. Consumer confidence will surge as a result. NZ has the potential to become a rockstar economy again.
FFS: Can we have a left-wing government back in charge - at least they understand the role of fiscal policy in the economy.
The current government completely missing in action but I suspect this is not accidental. Higher unemployment and distressed assets are very necessary for those with access to large amounts of a capital and the need to satisfy a return.
Well they were kicked out for spending the money we need to spend now, back when we did not need to spend it....
while they understand fiscal policy in bad time, they did not understand its role in good times.
In reality they do not understand much, other then spend spend spend. It would be handy now, but most of the time, the economy is not requiring this type of spending... inflation anyone?
Keynes
We're unlikely to get a left wing government, but maybe a left wing coalition of Lab, Greens and Tepati Maori, now that's an interesting combination!
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