Services sector indicator bodes ill for labour market

There are still worrying signs in the services sector. Photo / Getty Images

Activity in the country's services sector – which accounts for about two-thirds of the economy – bounced back from the lockdown doldrums in May, but still points to a souring labour market.

The Business NZ - Bank of New Zealand performance of services index rose 11.5 points to a seasonally adjusted 37.2, indicating activity shrank at a slower pace than in April when activity was limited to those firms deemed essential.

The recovery was in line with the performance of manufacturing index. However, like its sister survey, the employment sub-index was weaker, down 1.5 points at 40.9.

BNZ economist Doug Steel said the employment reading reflected the "very poor conditions" through May, and was at its lowest level since the survey began in 2007.

"Service sector net job losses mirror what we saw for manufacturing in last week's PMI, illustrating the considerable pain in the labour market even before the huge wage subsidy scheme scales down," Steel said.

"The trajectory of these indicators is consistent with our view that official figures for the labour market will likely get worse before they get better."

Rising unemployment is typically a lagging indicator, as firms respond to slowing activity by laying off staff. The unemployment rate peaked at 6.6 per cent in the first and third quarters of 2012, two years after the double-dip recession between 2008 and 2010.

BNZ's Steel said the combined PSI and PMI results reinforced his bank's view that the economy will shrink in the order of 19 per cent in the June quarter, while job losses will be greater in the September period.

The composite index rose 12.2 points to 37.7 on a GDP-weighted basis, and was up 14.4 points at 38.2 on a free-weighted basis.

The bounce in the services index will likely continue for a couple of months.

"However, we'd caution that just being allowed to open doesn't guarantee more activity. Standing back, there is no denying the outright level of the PSI remains woeful and still sits well below the lows at around 45 recorded during the 2008/09 recession," Steel said.

Stats NZ will release gross domestic product figures for March on Thursday. ANZ Bank New Zealand economists predict first-quarter GDP shrank 1.3 per cent, but should be looked through given most of the pain will be in the second quarter.

- BusinessDesk