Services sector boom confounds drop in business confidence

A new reading of the services sector shows no signs of an economy coming off the boil or a lack of confidence in future business conditions.

In fact, the headline BNZ-BusinessNZ Performance of Services Index (PSI) shows an acceleration of activity to 57.3 in May from 56.4 in April.

Furthermore, new orders surged higher to a very strong 64.6 – a reading only bettered twice in the past 10 years.

“It signals good demand for services and bodes well for sales ahead,” BNZ economist Doug Steel says.

A third positive feature from the data is that employment has notched up after a slower period in recent months.

“The positive signals in May from the PSI reinforce improvement we have seen in the index over recent months following a somewhat weaker patch earlier in the year,” Mr Steel adds.

“This may prove important context for [Thursday’s] official GDP figures if, as we expect, growth comes in a bit on the soft side for the first quarter of the year (we anticipate 0.5% GDP growth for that quarter on a seasonally adjusted basis).”

However, a composite index, of the improving PSI along with an above average reading in last week’s Performance of Manufacturing Index (PMI), cautions against extrapolating any softness in March quarter GDP too far forward.

Mixed signals
Mr Steel notes the buoyancy in the PSI is in contrast to some other indicators such as negative business confidence and “wavering” electronic card transactions.

These rose a seasonally adjusted 0.5% in May but slumped 0.7% drop in April. Rapidly changing payment methods mean true spending trends are difficult to measure.

“The positive PSI reading, including for the retail and accommodation sectors, offers some hope that retail sales through [the second quarter to June] are not as weak as currently implied by the electronic card transactions data.”

Meanwhile, REINZ data for May in housing markets outside Auckland and Canterbury show improved signs of resilience than the more equivocal figures over the past couple of months.

“The nationwide house price index, for instance, slipped 0.1% in May,” Mr Steel says. "But excluding Auckland it rose 0.3%, for an annual increase of 6.8%. And this is in spite of an ongoing drag from Canterbury, where prices are slipping slightly, in a manner similar to Auckland,

“Interestingly, while Auckland prices are arguably struggling most to increase, home sales there are doing better than the rest of the country. Auckland’s home sales in May were up 5.4% on a year ago, while for the rest of the country sales eased 0.5%.”

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