Service sector activity slows in May

Doug Steel, Bank of New Zealand economist

New Zealand service sector activity, which accounts for about two thirds of the economy, dropped in May as supplier deliveries slipped into contraction, though the broader index continued to expand.

The BNZ-BusinessNZ performance of services index fell 4.3 points to a seasonally adjusted 54.2 in May, from a revised 58.5 in April and down from 56.4 a year earlier. A reading above 50 indicates expansion. The average reading for 2014 is 56.4.

Last week the Reserve Bank hiked the official cash rate for a third time this year to 3.25 percent and confirmed its track for future rises in a bid to head off inflationary pressures. On Thursday data is expected to show economic growth accelerated by 1 percent in the first quarter, according to economists and central bank forecasts, as gross domestic product is bolstered by rising net migration and as construction in Canterbury picks up.

"We think a big lift in construction activity in Thursday's national accounts will be complemented by a decent expansion in the service sector," Doug Steel, senior economist at BNZ, said in a note. "The very strong positive trends that have been obvious in building consents for some time are now finally showing up in actual construction activity."

Four out of five of the sub-indexes which make up the PSI were in expansion in May, with supplier deliveries the only sub-group in contraction with a reading of 49.5. New orders/business led activity at 60.6, followed by activity/sales at 54.3, its lowest level since January 2013, BNZ said. Employment was 52.4 and stock/inventories reported a reading of 53.1.

"While the main activity/sales, employment and new order indices all cooled a bit between April and May, all of them remain above long term averages," Steel said. "Combined with the majority of other indicators, it is indicative of an economy growing above potential and will generate inflation is left unchecked. It is why the Reserve Bank lifted interest rates last week and suggested more hikes ahead."

The PSI survey comes after its manufacturing counterpart, the PMI, fell for a second consecutive month as the measure of new orders dipped to its lowest since December 2012, while remaining in expansion.

The seasonally adjusted BNZ-Business NZ performance of composite index, which combines the PSI and PMI and represents more than three quarters of the economy, decreased 4 points from its April reading to 54 on a GDP-weighted index, while the free-weighted index recorded 54.3 for the month.

Across New Zealand all regions remained above 50 in May, with Northern reporting a 55.5 reading, Canterbury/Westland at 54.5, Otago/Southland at 51.3 and Central at 51.2.

(BusinessDesk)


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