Service sector activity slows in July as dairy woes weigh

Activity in New Zealand's service sector, which accounts for about two-thirds of the economy, expanded at a slower pace in July from the previous month, as falling dairy prices and flattening residential building work weighed on economic growth.

The BNZ-BusinessNZ performance of services index fell 1.6 points to a seasonally adjusted 56.5 last month, its lowest level since February this year. The index, where a reading above 50 separates contraction from expansion, has been in expansion since October 2009.

The PSI follows a souring gauge of the manufacturing sector last week, where the BNZ-BusinessNZ performance of manufacturing index dropped to 53.5 last month from 55.1 in June. The performance of the composite index, which combines the two measures, decreased 1.7 point to 56 on a GDP-weighted index, while the free-weighted index fell 1.5 points to 55.6.

The fall in dairy prices caused some economists to revise down their expectations for economic growth in the coming year, and its impact on the country's terms of trade prompted the central bank to cut interest rates twice since June. Meanwhile, construction and building activity, which was forecast to help offset the dairy decline, is showing signs of cooling, with residential building consents tapering off in recent months, adding to nervousness about the outlook for the domestic economy.

"While lower dairy prices and flattening residential building activity would probably slow down New Zealand's economic growth over time, the latest solid readings from the service and manufacturing sectors shows there were still other factors driving decent growth in the meantime," BNZ senior economist Doug Steel said.

Four of the five sub-indices fell in July, while all remaining in expansion. Activity/sales edged higher to 60.4 last month, from June's reading of 60.1 Stock/inventories slipped to 51 from 53.4 in June, employment declined to 53.8 from 54.1, new orders/business dropped to 60.4 from 62.7 and supplier deliveries fell to 54 from 55.6.

(BusinessDesk)