Service sector going flat

The services sector is going flat, according to the latest monthly survey.

The Business New Zealand/Bank of New Zealand performance of services index (PSI) dropped to 50.6 in October.

Anything below 50 is contractionary and the slide in the survey this year – after being positive since June 2009 – suggests the services sector is struggling.

Services include the vital tourism sector, along with government services, construction, and wholesale trade, health services, among others.

The types of activity reported within the various sectors all point towards a drop off in optimism, if not outright contraction: new orders are still reasonably positive at 54.1, although this is 1.5 down form September.

Reported activity and sales, along with deliveries and stocks/ inventories are standing pat at 50.4.

In a crucial pointer to faltering optimism, employment is contractionary, down at 49.5.

The survey shows that even if the country’s retail sector got a boost from the Rugby World Cup, as reported earlier today, the service sector has largely seen any boost pass it by.

“Comments were slightly more on the negative (51.1%) than positive (48.9%) side for October, while activity from the Rugby World Cup was probably more on the negative than positive side as consumer dollars headed in that direction as opposed to other sectors of the economy,” Business New Zealand chief executive Phil O’Reilly said.

Bank of New Zealand head of market economics Stephen Toplis said a lot of the bad news from offshore is now starting to affect New Zealand’s services sector.

“The drop off in confidence that we are witnessing is probably the most disconcerting development. At least, in this regard, the PSI is still in positive territory but the question must be asked for how much longer?”

The European economic train wreck could yet hit New Zealand, he said, albeit indirectly.

“Already there is strong evidence that Asia is being adversely affected. Last week alone Chinese export data proved to be relatively poor – and bear in mind that China’s exports to Europe are greater than to the US - and the Indonesians surprisingly felt the need to slash their cash rate by 50 basis points.

“More generally, falling commodity prices, (particularly pertinent for New Zealand is the trend decline in dairy prices and the accompanying reduced payout forecast by Fonterra) in part reflect the growing Asian tensions. Watch this space very carefully for New Zealand is far more exposed to the Asian region than it is exposed to any other part of the planet.”