Signs of a perk-up in the manufacturing sector may have inspired thoughts that the under-the-pump services sector may also raise its head - but no, not yet

The services sector - which makes up about two-thirds of our GDP - is still wallowing, and has now been in contraction for the past 20 months.

The BNZ – BusinessNZ Performance of Services Index (PSI) for October showed another minor improvement, up to 48.7 from 48.3 in September, but "remains entrenched in contraction".

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 20 straight months with the services sector in contraction. The October result was also still well below the average of 52.8 over the history of the survey. 

The latest results dashed hopes the service sector might mirror the improving performance of the manufacturing sector. The latest BNZ – BusinessNZ Performance of Manufacturing Index (PMI) that was released on Friday showed New Zealand’s manufacturing sector expanding in October with a reading of 51.4, which was up 1.3 points on the previous month and now means the PMI has had four consecutive months above the breakeven 50 mark for the first time in three years.

The RBNZ made a jumbo 50 point cut to the Official Cash Rate,  taking it down to 2.5% last month, with the clear intent of trying to kickstart the faltering economic recovery.

However, BusinessNZ's CEO, Katherine Rich said on Monday that while the level of activity in the services sector has risen for the second consecutive month, the fact that none of the sub-index results managed to get above 50.0 during October shows "it is still tough times for service-based businesses".

For the sub-index results, Activity/Sales (48.9) recorded its highest value since January 2025, although New Orders/Business (49.5) slipped slightly from September. In addition, Employment (48.8) rose 0.9 points from September, recording its highest value since March 2025.

The proportion of negative comments for October (54.1%) was down from September (58.0%) and August (59.6%). Negative comments received show the services sector reporting weak demand and reduced customer spending due to the economic downturn, cost-of-living pressures, and low confidence. Rising operating costs, delays, competition, and project cancellations are further reducing sales, slowing activity, and creating cashflow challenges.

BNZ senior economist Doug Steel said if you were trying to find any positive traces in a still broadly weak sector, "the activity/sales index rose to its best outcome since January this year and its second-best month since February last year. But 48.9 is not strong".

"The glass-half full interpretation is that you must get less weak before you get stronger. Likewise, the employment index rose to 48.8 – its best result since March, albeit still below 50. And a drop in the inventories index may suggest greater control in that area."

Steel noted that the combined activity indicator from the both the manufacturing and services sector surveys did manage to edge a touch higher.

"It is getting closer to a level that would be consistent with the modest economic growth rates we are forecasting."