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NZ services sector activity perks up in July, allaying fears of manufacturing slowdown

Monday 13th August 2018

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New Zealand's services sector activity picked up in July as strong tourism numbers continued to underpin the wider economy, allaying fears about the impact of slowing manufacturing. 

The BNZ-Business New Zealand performance of services index rose 2.4 points to a seasonally adjusted 55.1 in July, reversing some of June's decline, and sitting above the long-run average of 54.5. Services account for about two-thirds of the country's economy, and the PSI series has been in a period of ongoing expansion since July 2010. A reading of 50 separates expanding activity from contraction. 

"There is still a decent economic pulse in the service sector. Moreover, there is some encouragement in the details too with activity/sales rising 3 points in July pushing back above its long-term average 56 in the process," Bank of New Zealand economist Doug Steel said in a note. "It all suggests that the service sector continues to tick along at a reasonable pace, if a bit slower than we have seen over the recent past." 

Steel said ongoing strength in accommodation and hospitality tied in with strong growth in tourist numbers and "remains an important source of growth", while retail continued to languish. 

The PSI's sister survey, the performance of manufacturing index, marked its second month below the long-run average, registering a contraction in production activity in July. Manufacturing is typically linked to the construction sector and despite New Zealand's massive pipeline of building work, construction firms are struggling to operate profitably as rising wage bills, more expensive building products, and tough contract conditions keep margins razor thin. 

The performance of composite index, which combines the PSI and PMI, rose 2.1 points to 54.8 on a GDP-weighted basis and increased 0.7 points to 54 on a free-weighted basis due to the recovery in the services sector. 

Steel said the indicators still point to slower economic growth, suggesting gross domestic product will increase around 2 percent in the second half of the year, slowing from the 3.3 percent pace in the March year, and "somewhat lower than most are forecasting". 

Among the sub-indices, new orders/business rose 1.6 points to 60.1, supplier deliveries gained 2.5 points to 50.6 and stocks/inventories increased 0.3 of a point to 51. Employment dipped 0.1 of a point to 49.9, the first time it's been in contraction since January 2013. 

"With sales and orders firm, this looks to be at least as much an issue with finding staff as any slowdown in labour demand," Steel said. 


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