Service sector activity falls sharply - June PSI

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Activity in the service sector has reached its lowest level since the Bank of New Zealand - Business NZ Performance of Services Index (PSI) began.

The PSI for June stood at 45.6, down 3.5 points from May, and 12.2 points down from the same time last year. A PSI reading above 50.0 indicates the service sector is generally expanding; below 50.0 that it is declining. The average PSI value since the survey began 16 months ago is 55.0.

Business NZ chief executive Phil O’Reilly said the June result was consistent with other sectors of the economy, also taking a hit from the general downturn in the economy.

The significant drop in overall activity in June follows three months of stagnant growth in the sector. Comments from respondents show operating costs continue to rise, while a drop in customers and ongoing/new contracts has also been felt throughout the sector. Although there may be seasonal factors at work, respondents have also noted that overall activity was still down on the same time last year.

“Looking offshore, the PSI survey in Australia has seen similar results, with overall activity dropping off sharply in June to a level equivalent with New Zealand’s. The latest JPMorgan Global PSI for June (49.3) also contracted for the first time in five months, so there looks to be little respite for those businesses who are more heavily engaged in the global market.

The Bank of New Zealand’s senior markets economist, Craig Ebert, said the obvious slump in the employment sub-index warned of tougher times ahead in the job market and fading job security.

“This fits with a number of other measures that warn us the jobs market is about to come off the boil much more obviously than has been the case in the official records to date."

Mr Ebert said this would take the steam out of wage inflation. “Gone will be the days where employees had many alternative jobs they could jump to, which would guarantee a big pay rise jump.”

Four of the five diffusion indices that make up the PSI continued to exhibit decline, while all exhibited their lowest ever values. Activity/sales (44.9) displayed its third consecutive level of contraction, while employment (41.8) dropped significantly from May. Supplier deliveries (42.7) was also in strong decline, however new orders/business (51.4) remained in positive territory.

Regional breakdowns showed almost all areas in contraction mode. The Otago/Southland region (36.1) continued to be the worst hit, following two months of falls in activity. Both the Northern (43.9) and Central (47.9) regions experienced a decrease after the May result of largely no change, while the Canterbury/Westland region (51.1) remained the only area where results over recent months have steadily improved.