Service sector rebound could be just a blip

New figures scream “recovery mode” for the retail and services sector – but these could be a short-term blip.The latest Bank of New Zealand. Business New Zealand performance or service index (PSI) shows continued improvement in the sector after a long period in the doldrums (see graph).

New figures scream “recovery mode” for the retail and services sector – but these could be a short-term blip.

The latest Bank of New Zealand. Business New Zealand performance or service index (PSI) shows continued improvement in the sector after a long period in the doldrums (see graph).

Although the index shows a slight drop for the month the drop is a minuscule 1.6% on the index – and at least some of this can be put down to the impact of public holidays at the end of the month.

More tellingly, it is the second consecutive month that all the survey sub-groups are in expansion mode, Bank of New Zealand economist Craig Ebert said.

The figures also pointed to higher than anticipated retail sales activity for the fourth quarter, he said – and that would feed into stronger fourth quarter GDP.

The other factor was what effect it would have on Reserve Bank governor Alan Bollard’s next review of the official cash rate, due this Thursday.

No one expects Dr Bollard to lift the rate beyond its present 2.5% level but the OCR’s current setting is regarded as "stimulatory" and the growing tide of positive economic data means the need for stimulation from interest rates is dwindling.

However, the important question, as it affects retail and services trade, is to what extent this is “catch up” and also consumers taking advantage of the high New Zealand dollar leading to lower prices for imported consumer goods. (Retail figures are seasonally adjusted so the usual Christmas surge in spending is taken into account).

The one area of the domestic economy which has been in decline recently is house sales.

Loan approval numbers are down 18% on a year ago, Mr Ebert pointed out – and he adds that the figures for a year ago were unusually low.

That shows one of the biggest drivers of higher medium term consumer spending – housing market confidence – just isn’t there.

Which in turn means policymakers should be “a little wary on the outlook for consumer spending,” he said.