Services sector dives in June, confirming a softening in economic growth

Growth in the services sector slowed sharply in June, confirming an overall softening in the economy after a spurt in May.

The BNZ-BusinessNZ Performance of Services Index (PSI) shed 4.3 points to 52.8, the lowest level since December 2012 and compared with 57.1 in May.

(A reading above 50.0 indicates that the service sector is generally expanding; below 50.0 that it is declining.) 

This follows a further drop in the manufacturing index (PMI), released last Friday, that economists say backs up the "June gloom" drop in business confidence.

"While some have discounted weak business confidence readings of late, the PSI and PMI results are not so easily dismissed as these are surveys of business outcomes not based on sentiment, outlooks or expectations,” BNZ senior economist Doug Steel says. “In this sense, they are arguably more worrying from a growth perspective.” 

Seven of the 10 industry groups in the PSI recorded a lower reading than this time last year. However, retail posted its strongest June result since the survey started in 2007. Larger firms also posted a record high compared with weaker results from smaller ones.

All five components fall
BusinessNZ chief executive Kirk Hope says all five of the index’s components noticeably dropped, though four remained in expansionary mode.

The exception is supplier deliveries, which is at 48.3. New orders/business (58.6) is at its lowest since April 2017, while employment at the no change level (50.0) is the lowest since January 2013.

Stocks/inventories is at 50.9 and activity/sales is at 54.7.

“Interestingly, the proportion of positive comments in June (59.5%) was slightly up on May (58.0%), although given the sector is still showing expansion a swing to negative comments dominating would have been surprising,” Mr Hope says.

Looking to the future, Mr Steel says the poor outcome is below-consensus economic growth forecasts.

“If these indicators stay this low, it suggests annual growth of 2% or below, rather than the near 3% that we currently forecast,” he says.

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