'The big question to end 2025 was whether the economy may be turning. Data since then has given us confidence that recent positive momentum can be sustained. The economy is growing'

The services sector, which makes up about two-thirds of New Zealand's GDP, expanded again in January, following on from growth in December.

The significance of that is it's the first time since 2023 the services sector has expanded for two consecutive months.

The expansion of services in January, following on from similar growth in manufacturing for the month, highlights that the much awaited economic recovery is starting to happen. 

These further signs of economic recovery will provide food for thought for the Reserve Bank (RBNZ) ahead of its first Official Cash Rate (OCR) review for the year on Wednesday.

At the moment the OCR is set at a stimulatory level of 2.25% (with the so-called neutral level believed to be somewhere over 3%). If the economic recovery continues to take hold, the question will be very much when the RBNZ decides to 'normalise' the OCR - IE to start raising it again in order to stop the growing economy starting to generate more inflation.

This is particularly salient at the moment with annual inflation as of the December quarter sitting at 3.1%, and therefore outside of the RBNZ's 1% to 3% target range.

Nobody expects the RBNZ to hike the OCR this week, but its announcement will be watched closely for signals of when the first rise might come.

But that's in the future. For now we have news that the long awaited economic recovery is taking hold.

According to the BNZ – BusinessNZ Performance of Services Index (PSI), the index for January was 50.9 (A PSI reading above 50.0 indicates that the service sector is generally expanding; below 50.0 that it is declining).

Although that was 0.8 points lower than December and below the average of 52.8 over the history of the survey, BusinessNZ's CEO, Katherine Rich said; "at least the sector remains on the right side of the ledger after such a lengthy period of contraction."

It was the first time since mid-2023 that the PSI has expanded for two consecutive months.

The latest BNZ –BusinessNZ Performance of Manufacturing Index (PMI), released on Friday, was 55.2 and although this was 0.9 points lower than December, it was still above the average of 52.5 since the survey began.

Commenting on the PSI release on Monday, BNZ's Senior Economist Doug Steel said that the big question to end 2025 was whether the economy may be turning.

"Data since then has given us confidence that recent positive momentum can be sustained. The economy is growing," he said.

"When one or two leading indicators imply things are going well, tread with caution. When nearly every indicator is saying the same story, then you can’t ignore it."

Steel said "wherever you look" it is clear that the economy is gaining momentum.

The question has now shifted from ‘will there be growth?’, to ‘what is potential growth?’, he said.

"We are carefully monitoring the point at which the growth the economy is seeing turns into inflationary pressure.

"Headline inflation is already a touch above the RBNZ’s 1 – 3% target range and this is occurring at a time when the economy is coming out of a deep recession. Potential growth appears to be quite low. We are forecasting annual inflation to decline from here, but the pace of easing could slow if economic activity outpaces potential growth," Steel said.