Service sector expands at fastest recorded pace in October

Rally ends a horror run of data that had analysts increasing expectations for an interest rate cut next month.

New Zealand's service sector grew at its fastest recorded pace last month as sales activity rallied, ending a horror run of data that had analysts increasing their expectations for an interest rate cut next month.

The BNZ-Business New Zealand performance of services index rose 7.5 points to 57.4, seasonally adjusted, in October in its biggest monthly gain since the survey began in 2007.

A reading above 50 indicates the sector is growing, and the industry was in contraction in September.

"The extent of improvement is quite staggering," economist Doug Steel says in his commentary. "The improvement in the likes of today's PSI gives the RBNZ a bit of time to assess the evolving domestic economic landscape, in the wake of some horrible looking numbers for Q3."

The kiwi dollar rose to 81.37 US cents from 81.23 cents before the report was released.

Third-quarter figures have been weaker than forecast, with unemployment hitting a 13-year high and retail spending missing expectations. A sister series, the performance of manufacturing index, last week showed an improvement in industrial production in November.

Today's figures showed the biggest gains in activity/sales, which rose to 62.7 and new orders/business at 62.7. Employment returned to an expansionary 52.1, and supplier deliveries ended three months of contraction with 54.7.

Finished stocks were the only sub-index to report a fall, slipping to 51.

Across the regions, central was the only area in contraction at 48.8, with northern leading expansion at 60.7, followed by Canterbury/Westland at 56 and Otago/Southland at 55.6.

The composite index, which combines the services and manufacturing indices, rose 7.7 points on a GDP-weighted basis to 56.9 and 5.9 points to 54.9 on a free-weighted basis. The pick-up was underpinned by the services sector.

Mr Steel says the PCI indicates annual growth of some 3% and the figures "add some weight to the idea that any hole that may have developed is not getting bigger".