New Zealand’s services sector is only “inching” ahead and means there’s little chance of the unemployment rate falling until meaningful services job growth returns, according to a BNZ economist.
The latest monthly edition of the BNZ – BusinessNZ Performance of Services Index (PSI) was released on Monday, showing a PSI reading in July of 50.6. A reading above 50.0 indicates the services sector is generally expanding, while a reading below 50.0 indicates it's declining.
“The positive take is that this represents progress, with the past two months having shown better readings than for most of the past three years,” BNZ senior economist Doug Steel said.
“On the other hand, the PSI is only just above breakeven and most sub-indexes are below their long-term averages (stock/inventories is the exception and not necessarily a positive sign). All this indicates a below-average rate of service sector expansion with no signs of acceleration in July. That is disappointing.”
July’s PSI was 0.3 points lower than June’s 50.9 result.
The NZ services sector makes up about two-thirds of the country’s Gross Domestic Product (GDP), the official measure of economic growth.
BusinessNZ chief executive Katherine Rich described it as “encouraging” that the PSI held above 50.0 for a second month in a row, even if the pace has eased slightly from June.
Across the PSI’s five main indices, new orders/business was up the highest at 52.6. Activity/sales was 50.5 and stocks/inventories was 51.6.
Supplier deliveries and employment were the lowest indices in July, both coming in at 48.5.
Comments from PSI respondents showed that cost of living pressures, fuel and petrol prices and rising interest rates remain front of mind for many. A number also cited uncertainty ahead of the election, according to Rich.
“Employment remains the sector's soft spot, sitting at 48.5 alongside supplier deliveries, which tells us firms are still cautious about committing to new hires. Until consumer confidence firms up further, this recovery will likely stay modest rather than becoming the stronger bounce we've seen in manufacturing,” Rich said.
Given the size of New Zealand’s services sector, Steel said there seems “little chance” of the unemployment rate falling until meaningful services job growth returns.
The jobless rate rose to 5.6% in the June quarter, the highest it has been for more than a decade, with 166,500 people unemployed in April, May and June.
“The PSI suggests this didn’t happen in July,” he said.
Manufacturing sector remains 'buoyant'
The BNZ - BusinessNZ Performance of Manufacturing Index (PMI) released on Friday found NZ’s manufacturing sector continued to expand in July, but at a much slower speed compared to the June PMI results, where it rose to 60.1.
The PMI for July was 54.3. Similar to the PSI, a reading above 50.0 indicates the manufacturing sector is generally expanding, while a reading below 50.0 indicates it's declining.
July’s PMI was 7.6 points lower than June’s 60.1, but 1.8 points higher than the long-term average of 52.5 over the history of the survey.
BusinessNZ director of advocacy Catherine Beard said after June’s “exceptional” PMI result, it wasn’t surprising to see some of the index’s momentum ease.
“But a reading of 54.3 still represents solid expansion for the sector,” she said.
According to Beard, comments from the PMI respondents showed that cost pressures, from fuel and freight through to raw materials and the ongoing Middle East conflict, remain front of mind for many manufacturers. However, a fair share also pointed to steady order books and stronger export sales as reasons for optimism.
Steel said some month-on-month volatility in the PMI is common and not an immediate cause for concern.
“This returns the PMI close to its levels at the start of the year, before the onset of conflict in the Middle East and the subsequent oil price uncertainty,” he said.
Out of the PMI’s main five indices, production was strongest, with a result of 57.3 following large jumps in new orders over May and June. Finished stocks came in at 53.2, new orders at 53.3, while deliveries reported a result of 55.8.
Employment was the weakest subindex at 52.8, but Steel said employment tends to lag other indicators, and this result still points to growth and momentum in the sector.
“Although the manufacturing sector remained buoyant in July, sentiment contained some cautionary notes. Businesses that returned negative commentary cited geopolitical tensions and fuel price volatility as key concerns, while higher raw material costs, inconsistent forward orders, and softer consumer spending serve as a reminder of the headwinds facing an otherwise resilient industry.”
Steel said overall, the July PMI result painted a “positive start” to the third quarter of the year, with the data adding to several forward-looking indicators which have suggested economic momentum is building.
“While we have slight negative GDP growth pencilled in for Q2, these data provide further support to the notion of positive growth thereafter,” he said.
Statistics NZ will release the June quarter GDP figures on September 17. In the March quarter, NZ’s economy grew 0.8%, below the Reserve Bank’s 1% projection.
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