Service sector activity up, may indicate increased savings

New Zealand's service sector activity improved slightly during February, though not enough to suggest a roaring out of last year's economic recession.

BNZ economist Doug Steel speculates that soft retail sales may indicate that households are, at last, increasing their savings rate.

At an index rating of 58.9, new orders showed the most expansion of the five sub-categories in the BNZ-Business New Zealand Performance of Services Index. A PSI reading above 50 points indicates services activity is expanding; below 50 indicates it is contracting.

Activity/sales at 55.6 picked up from January to record a similar value to December, and while employment at 50.6 fell 2.1 points from January, it still remains in expansion mode for the fifth consecutive month. Supplier deliveries slipped 0.3 points to 50.

Only stocks/inventories at 49.2 showed slight contraction after three consecutive months of slight expansion.

The various service sectors were a mix of expansion and decline during February. Retail trade reflected other recently released sluggish figures in contracting at 47.6, as did transport and storage at 47.8. Health and community services expanded at 58.8, wholesale trade was up at 54.2, accommodation, cafes and restaurants at 52.6 picked up from January, and property and business Services at 52.4 experienced expansion after two months of decline.

The retail trade index drop ties in with weaker indicators published recently. Official retail sales for January published last Friday were soft, with core sales only 0.3% up following a 2% drop in December. The value of electronic card transactions at retail stores fell 0.4% more than usual in February.

"We are starting to wonder if some of the weakness reflects households materially increasing their savings rate," said BNZ economist Doug Steel.

"We say this with signs that employment indicators are improving and consumer confidence has strengthened to a relatively strong level. This is not usually the backdrop to falling spending."

Anecdotally it has been observed that households have not dropped their mortgage repayments as much as the big fall in mortgage rates has afforded, implying an increased deb repayment, Steel said. "While a pain for shopkeepers, this is fundamentally a good thing in respect of desired de-leveraging," he said.

He also questioned how much of the disappointing trend in nominal retail spending reflects aggressive discounting by retailers as opposed to poor volume.

"This, by the way, is a gentle reminder that the retail sector is probably not the place to look for the leading edge of New Zealand's GDP recovery," Steel said.

"That mantle seems to be migrating to the likes of manufacturing, the broader services sector, and even some parts of the construction sector."

The hint of a plateau across the service sector indices "would be important given the current rate of expansion seems enough for only mild net job creation - judging by the employment index just keeping its nose above the 50 line in February," Steel said.

"Moreover, the implied labour demand will struggle to keep up with ongoing labour supply, the corollary being an unemployment rate that is likely to stay elevated for a while yet."

This labour market slack means no immediate need to lift interest rates from record lows, which was the clear message and non-action signaled from the Reserve Bank's latest Monetary Policy Statement released last Thursday.

Businesswire.co.nz

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