The services sector - which makes up about two-thirds of our GDP - is looking like a sector that could really do with the stimulus of the jumbo cut to the Official Cash Rate made by the Reserve Bank last week flowing through as soon as possible.
The BNZ – BusinessNZ Performance of Services Index (PSI) for September did improve slightly from 47.5 in August to 48.3, but it's relative. A PSI reading above 50.0 indicates that the services sector is generally expanding; below 50.0 that it is declining. It's now been 19 straight months with the services sector in contraction. "Mired in contraction" is the expression used with the latest PSI media release.
The service sector results were again slightly worse those from the latest BNZ – BusinessNZ Performance of Manufacturing Index (PMI) that was released on Friday. That showed New Zealand’s manufacturing sector again remained just below expansion levels for September, with the seasonally adjusted PMI for September 49.9. This was exactly the same result as August but below the average of 52.4 since the survey began.
The RBNZ last week cut the OCR to 2.5% from 3.0% and left the door wide open for another cut in November, which would take the cash rate down to 2.25%. The RBNZ indicated that last week's larger cut signalled to businesses and households that it was safe to resume spending and investment.
But the latest PMI and PSI results have been enough to prompt BNZ economists to slightly lower their economic growth and employment forecasts.
Speaking to the latest services sector figures on Monday, BusinessNZ's CEO, Katherine Rich said that it was a case of "a different month but the same story for the sector".
She said for the sub-index results, Activity/Sales (47.8) and New Orders/Business (49.6) did pick up from August, but still remained in contraction. Employment (47.8) experienced increased contraction, while Stocks (50.6) was the only sub-index to show expansion during September.
The proportion of negative comments for September (58.0%) was down on August (59.6%) and July (58.5%).
"Negative comments received show that the services sector continues to struggle under weak economic conditions, with low consumer confidence, reduced discretionary spending, and high living costs curbing demand. Businesses report falling sales, fewer new contracts, and cautious clients delaying projects amid rising costs and ongoing uncertainty about the broader economy," Rich said.
BNZ's Senior Economist Doug Steel said that "in isolation, the combined PMI/PSI activity indicator warns of economic growth struggling to gain traction".
Steel said the soft labour market is "weighing on consumer confidence".
"We have been warning for some time that the labour market will lag New Zealand’s economic recovery. In September, the PSI employment index was the weakest sub-index and eased slightly from 48.4 to 47.8. It suggests current employment conditions are subdued, even if other indicators like new job ads and [NZIER's Quarterly Survey of Business Opinion] hiring intentions suggest that the worst for employment may be behind us," Steel said.
And, subsequently in BNZ's Markets Outlook publication for the week, Steel said the subdued PMI and PSI "see us nudge down our near term growth and employment forecasts, after previously highlighting downside risk if these and other indicators did not show sufficient improvement".
"This also follows from some weaker indicators from last week’s QSBO, including some paring in businesses’ growth expectations, weak reported employment, and a slump in investment intentions."
Steel said BNZ economists' estimate for Q3 GDP now sits at 0.5% (from 0.7%).
"This is likely still a touch above the RBNZ, given the Bank’s 0.3% projection in the August MPS and last week’s description of Q3 activity as ‘recovered modestly’," Steel said.
"The easing cycle feels mature. However, even with some downside protection built in by the RBNZ, we must keep an open mind to how low the cash rate may ultimately need to go.
"More uncertainty from the latest trade tensions offshore is an example of the fluid nature of developments at the present time. The latest tensions could see yet more caution from domestic businesses and households, especially if tensions were to persist or escalate."
Steel said if domestic activity were to disappoint on the downside it would increase the chance the cash rate pushes lower than currently anticipated.
14 Comments
Good thing we got the Treaty Principles Bill the airtime and focus last year so we could run out of puff this year.
Here's a recipe for stagflation - contracting GDP, contracting private sector spending and investment, contracting government spending and investment, rising unemployment, falling interest rates, falling NZ dollar and rising inflation.
The current NZ government are doing a mini-Argentina similar to Milei and relying on the same back to front economics.
They can't keep borrowing forever. Well maybe they can, but then we really will end up like Argentina.
Government spending is not paid for with borrowing - the governments financial position sits on the opposite side of the ledger to the private sector. In the first instance government spending is done through the RBNZ creating new money out of thin air at the instruction of Treasury.
This is the benefit of a sovereign fiat currency - it allows governments to spend through private sector cycles and this acts as an automatic stabilizer for the economy overall.
That argument is pure rubbish. If it were true that the government could print with impunity, why not print every man woman and child a billion dollars, we could all be rich. I suspect it would create inflation and/or unemployment.
Keynes is theoretically correct but in practice it'll have dire consequences. Imagine if the Greens and Te Pati Maori cottoned onto this. Labour to some extent as well. I think it's also part of MMT, Modern Monetary Theory, aka Magical Money Tree.
A fiat currency monetary system is real and the mechanical steps of government spending are described correctly by MMT - whether you agree with the rest of MMT or not.
The government spends first by creating reserves which create deposits in private sector bank accounts - taxes and bonds come after the money is already circulating. Taxes and bonds are used to control the money supply and manage inflation and interest rates. They don't literally pay for government spending. But they do "make room' for government spending so that inflation is not caused by the new money the government creates.
Correct. Note that Govt deficit spending and / or net private bank lending has to overcome a country's current account deficit.
Taxes and bonds are used to control the money supply and manage inflation and interest rates
The money supply is continuously expanding. So, in some ways, the idea of govt controlling the money supply is a cop out.
And as we know, monetary expansion is in itself 'inflation'.
I know it sounds crazy but if you look at how fiat currency monetary systems work - all of them - the US, Australia, the UK and NZ - spending happens regardless of how many bonds are sold or how much tax revenue has come in.
Which makes sense if you think about it - the government doesn't cut back on pensions, teachers, welfare etc when the tax revenue falls. If you want more information look into what 'reserves' are and what happens when the RBNZ creates 'reserves'.
Also - think about the GFC - the commercial banking sector collapsed and millions of jobs were lost and businesses closed around the world. Tax revenue fell drastically - where did governments get the money from that they used to bail out the banks and stop the entire financial system from disintegrating? The government has its own bank - a reserve bank - but its liabilities and assets are the opposite to the private sector.
For example - reserves - the measure of government 'debt' or liability is an asset in the private sector. Government debt does not sit with the private sector. As obvious examples consider free education and free healthcare - costs that sit on the government are a cost saving (an asset) in the private sector.
The government has its own bank - a reserve bank - but its liabilities and assets are the opposite to the private sector.
Even though the hoi polloi are led to believe that central banks are independent of govt.
I would argue that central banks in the Anglosphere work in the interests of the commercial banks. They're largely inseparable.
"where did governments get the money from that they used to bail out the banks and stop the entire financial system from disintegrating? The government has its own bank - a reserve bank"
Equally true for the GFC and for the Covid lockdowns. Where did this lead many governments today? Broke, in an unsurmountable, un-repayble, amount of debt. About $33 Trillion for the US I think and their USD has started the inevitable collapse. France and many other countries are not much better off.
I'm with JJ on this.
That pure rubbish is how the Savage government funded the original state housing programme.
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