Service sector outlook drops back to level of 2007-09 recession

More economic signals emerged today pointing to a slowdown in economic activity.

The data comes at the start of a big week for economic news, with the latest current account figures due out on Wednesday and the latest GDP figures on Thursday.

Today’s data does not point to a return to recession but it does suggest economic growth may be slowing to margin-of-error levels.

The latest performance of services index (PSI) shows growth in the sector flat, at 50 in a 100-point index where anything above 50 points to growth and anything under points to shrinkage.

It is also the fourth consecutive month fall in the index, Bank of New Zealand senior economist Craig Ebert says. Combined with last week's performance of manufacturing index (PMI) figures, the trend is worrying.

"The degree of slowdown in the PMI and, now, the PSI, along with the seizure in their employment components, certainly asks questions about the economy’s momentum."

Business New Zealand – which jointly sponsors the index with the Bank of New Zealand – says the trend is worrying.

“Like last month, a general slowdown and lack of demand continues to adversely affect some, while trying to establish the main reasons for positive business activity is difficult given the wide spectrum of comments,” Business NZ chief executive Phil O’Reilly says.

“Looking beyond the comments, of particular concern is the employment result, which combined with the weak employment result for the manufacturing sector shows that one would have to go back to 2009 to record a lower composite figure.”

The economy was still in recession in the first half of 2009.

Also out today is the latest New Zealand Institute of Economic Research consensus forecast update, which also points to slower growth.

The economy will, according to the forecasts, continue to grow rather than contract, but at a slower pace than previously thought.

“Global headwinds” is given as the main reason: weaker growth in New Zealand’s trading partners and a higher New Zealand dollar are all hurting the economy, principal economist Shamubeel Eaqub says.

The consensus outlook is for an average of 2.6% growth in GDP for the next three years.

“Growth in new jobs will be solid but unspectacular, mirroring the gradual economic recovery. Wages will also grow at a moderate pace.

“A gradual recovery means that inflation will remain muted. Forecasters expect interest rates to be lower for longer, with gradual rate increases expected from late 2013.”

That also means lower tax revenue for the government, making it harder to fulfil its policy of returning the government books to surplus by the end of the 2015 financial year.