Services sector strong in February, points to growth in year ahead

Activity in New Zealand's services sector, which accounts for about two-thirds of the economy, dipped slightly last month but remains strong with broad-based growth.

The BusinessNZ-BNZ performance of services index fell 0.7 points to 58.8 in February, above the long-term average of 54.1. Three of the five sub-indices increased, and all remained above the level of 50 that separates expanding activity from contraction.

Bank of New Zealand economist Doug Steel said the tight range in the PSI of 58.3-to-59.5 range over the past four months and the four-year range of 53.4-to-59.6 underscored the strength of the sector.

"The persistently high level of the PSI indicates that the service sector is growing at a strong and steady pace," Mr Steel said. "Indeed, such growth was integral to New Zealand posting positive economic growth in last week's Q4 GDP (gross domestic product) figures, when manufacturing and primary sector activity dipped."

Sales and new orders both dipped, with sales down 0.1 points to 60.6 and new orders falling 2.2 points to 61.8, though both sub-indices posted their fourth consecutive month above the 60 mark. Employment rose 0.9 points to 54.6, meaning it entered its fifth year without contraction, while supplier deliveries rose 1.7 points to 58.8 and stocks gained 0.1 points to 57.5.

The PSI strength, combined with gains in the performance of manufacturing index last week, points to GDP growth ahead, Mr Steel said. The composite index, which marries the PSI and PMI, dipped 0.4 points to 58.3 on a GDP-weighted basis and gained 0.6 points to 57.4 on a free-weighted basis, with the latter mainly due to the lift in manufacturing activity.

"It is supportive evidence to the idea that economic growth has picked up a bit in early 2017 following a deceleration in the final quarter of 2016," Steel said. "It supports our view not to fret too much about last week's softer GDP outcome. It even suggests upside risk to our current economic growth forecast of 2.7% for 2017, even challenging our broader view that growth is currently in the process of peaking."

Building consents and house sales continued to slow, albeit from a historically high level, with house sales down 10% in February and trend residential building consents in January about 5% lower.

"These are areas to watch amid the general near term positive signals above regarding the services sector," Mr Steel said.

(BusinessDesk)