The services sector – which makes up about two-thirds of our GDP – is looking like a sector that could really do with the stimulus of the jumbo cut to the Official Cash Rate made by the Reserve Bank last week flowing through as soon as possible.

The BNZ – BusinessNZ Performance of Services Index (PSI) for September did improve slightly from 47.5 in August to 48.3, but it’s relative.  A PSI reading above 50.0 indicates that the services sector is generally expanding; below 50.0 that it is declining. It’s now been 19 straight months with the services sector in contraction. “Mired in contraction” is the expression used with the latest PSI media release.

The service sector results were again slightly worse those from the latest BNZ – BusinessNZ Performance of Manufacturing Index (PMI) that was released on Friday. That showed New Zealand’s manufacturing sector again remained just below expansion levels for September, with the seasonally adjusted PMI for September 49.9. This was exactly the same result as August but below the average of 52.4 since the survey began.

The RBNZ last week cut the OCR to 2.5% from 3.0% and left the door wide open for another cut in November, which would take the cash rate down to 2.25%. The RBNZ indicated that last week’s larger cut signalled to businesses and households that it was safe to resume spending and investment.

But the latest PMI and PSI results have been enough to prompt BNZ economists to slightly lower their economic growth and employment forecasts. 

Speaking to the latest services sector figures on Monday, BusinessNZ’s CEO, Katherine Rich said that it was a case of “a different month but the same story for the sector”.

She said for the sub-index results, Activity/Sales (47.8) and New Orders/Business (49.6) did pick up from August, but still remained in contraction. Employment (47.8) experienced increased contraction, while Stocks (50.6) was the only sub-index to show expansion during September.

The proportion of negative comments for September (58.0%) was down on August (59.6%) and July (58.5%).

“Negative comments received show that the services sector continues to struggle under weak economic conditions, with low consumer confidence, reduced discretionary spending, and high living costs curbing demand. Businesses report falling sales, fewer new contracts, and cautious clients delaying projects amid rising costs and ongoing uncertainty about the broader economy,” Rich said.

BNZ’s Senior Economist Doug Steel said that “in isolation, the combined PMI/PSI activity indicator warns of economic growth struggling to gain traction”.

Steel said the soft labour market is “weighing on consumer confidence”.

“We have been warning for some time that the labour market will lag New Zealand’s economic recovery. In September, the PSI employment index was the weakest sub-index and eased slightly from 48.4 to 47.8. It suggests current employment conditions are subdued, even if other indicators like new job ads and [NZIER’s Quarterly Survey of Business Opinion] hiring intentions suggest that the worst for employment may be behind us,” Steel said.

And, subsequently in BNZ’s Markets Outlook publication for the week, Steel said the subdued PMI and PSI “see us nudge down our near term growth and employment forecasts, after previously highlighting downside risk if these and other indicators did not show sufficient improvement”.

“This also follows from some weaker indicators from last week’s QSBO, including some paring in businesses’ growth expectations, weak reported employment, and a slump in investment intentions.”

Steel said BNZ economists’ estimate for Q3 GDP now sits at 0.5% (from 0.7%).

“This is likely still a touch above the RBNZ, given the Bank’s 0.3% projection in the August MPS and last week’s description of Q3 activity as ‘recovered modestly’,” Steel said.

“The easing cycle feels mature. However, even with some downside protection built in by the RBNZ, we must keep an open mind to how low the cash rate may ultimately need to go.

“More uncertainty from the latest trade tensions offshore is an example of the fluid nature of developments at the present time. The latest tensions could see yet more caution from domestic businesses and households, especially if tensions were to persist or escalate.”

Steel said if domestic activity were to disappoint on the downside it would increase the chance the cash rate pushes lower than currently anticipated.