Service industry showing signs of life

Dental surgery. Photo / Rotorua Daily Post

One of the first sectors that feels the pinch in a recession is the service industry. In general, people cut down on their use of non-essential services when times are hard.

So figures today which show that for the first time in 16 months, the service sector showed a marginal return to growth, are encouraging for the economy.

The service sector showed its first sign of expansion (albeit at a very modest level) for the first time since March 2008, according to the BNZ Capital - Business NZ Performance of Services Index (PSI).

The PSI for July stood at 50.1, which was 5.1 points up from June. In comparison with previous years, the July result was 1.2 points up from July 2008, but still 5.1 points down from 2007. A PSI reading above 50.0 indicates that the service sector is generally expanding; below 50.0 that it is declining. The average PSI value for 2007 was 58.1, while for 2008 it was 49.1. So far for 2009, the average score has been 45.9.

Business NZ chief executive Phil O'Reilly said that it was pleasing to see the sector climbing its way out of a lengthy run of contraction, which had seemed entrenched in a relatively small activity band of decline.

"However, the July result is only the start of what needs to happen over the next few months to get the sector back into top gear", he said.

"New Zealand is now ahead of the game compared with service sector activity levels on the global scale (46.5), and with new orders/business showing a strong result this should help boost sales/activity in the coming months. Also, comments from respondents note changing fortunes with enquiries picking up, buyers coming back and new contracts being established. But other comments show many businesses still struggling, and the possibility of further closures and staff layoffs are not out of the question.

BNZ Capital Senior Economist Craig Ebert said the overlying trends are encouraging, however if you look below the surface it's not all good news.

"There are still some regions languishing below the 50 mark, and some industry sectors - such as finance and hospitality - also need to pull upwards.

"However, the signs are there that genuinely higher production and a more concerted pulse in subsequent NZ PSI surveys is in store. There are positive signs of progress and we might even say that New Zealand's PSI overall is now getting the better of its global competitors."

Three of the five diffusion indices that make up the PSI exhibited contraction during July, but the key indicators of activity/sales (51.7) and new orders/business (56.5) exhibited its highest values since March 2008 and February 2008 respectively. Employment (47.9) improved to its highest level since November 2008, while stocks/inventories (42.1) increased 1.1 points since June. Deliveries (46.0) picked up from its lowest ever result, as well as being the highest value since March 2009.

Activity was positive in two of the four main regions in July, with the Canterbury/Westland (53.1) and Northern (51.2) regions displaying their strongest level since December 2008 and February 2008 respectively. However, the Otago/Southland region (43.7) showed a slight dip after some recovery in June, while the Central region (45.8) continued to record its lowest level of activity since the survey began.

- NZHERALD STAFF