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NZ services sector weathers shocks, grows slowly during October

Monday 15th November 2010

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New Zealand's service sector has weathered some tough economic news and stressful climatic and environmental impacts during October to continue to remain in expansionary territory.

The BNZ-Business NZ Performance of Services Index for October, of which retail sales forms about two-thirds, stood at 52.0, which was down 2.9 points from September. The index provides an early indicator of activity levels, with a reading above 50 indicating expansion, below 50 a contraction.

"It is generally quite remarkable that the series is as strong as it is given the general malaise in the economy, and that during the period we had a number of shocks including the Canterbury earthquake and the Southland snowstorm," said BNZ head of research, Stephen Toplis. "Given what's been thrown at us, it's remarkable that confidence shows a net positive."

October's figure returned to the level of activity experienced in August, and is also the highest October figure since 2007.

Despite the reduction in expansion, four of the PSI's five sub-indices were still in growth mode during October New orders/business fell 3.8 points to 53.1, and activity/sales dropped 2.4 points to 54.9. Stocks/inventories at 50.1 were largely unchanged from September, while supplier deliveries fell 2.5 points to 50.1. Employment was flat in October at 49.8, down 3.6 points from the previous month.

The wholesale trade sector at 48.0 and retail trade at 49.2 fell back after healthy expansion in September, with property and business services at 55.9 experiencing a lower level of expansion as did health and community services at 54.1.

The level of positive comments decreased to 47.9% during October, compared with 53.5% in September, 46.2% in August, 40.1% in July and 47.9% in June.

Toplis said it is ironic that sales are struggling given other factors that are quite supportive of sales growth. This includes a 1.8% rise in the employment rate over the past year, a fall in unemployment, an average weekly earnings rise of 2%, the boost to disposable incomes through tax cuts, a fall in benchmark interest rates, boosted commodity prices and measured consumer confidence remaining relatively high.

"Under normal circumstances this would portend growth not only in retail sales, but across the wider economy, much stronger than we are currently witnessing," said Toplis. "We think the explanation for this apparent dichotomy is the paradox of thrift."

He said it is likely that a shift in household behaviour is occurring, though whether this is only temporary remains to be seen. A rebalancing towards more saving is good news for the economy over the longer term basis, as it increases the likelihood that the current economic expansion can be sustained.

"Be that as it may, the downside is that every dollar saved is one that will not bolster the coffers of retailers, he says.

The country's "rebalancing" will continue for some time Toplis predicts, and is one of the reasons the BNZ is forecasting just 1.5% private consumption growth through calendar year 2011 against a total GDP expansion of 3.5%.

Interpretation of the total economic data often depends on whether people are "glass half full or half empty," in their outlook Toplis said.

"Some could say things aren't very exciting, and the situation's negative, but, given how tough the global environment is and the shocks we've had to the system, its remarkable we've had any growth at all," he said.

 

Businesswire.co.nz



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