NZ services sector dips in October, supply-side indicators weaken

New Zealand's services sector, which accounts for about two-thirds of the economy, dipped in October.

New Zealand's services sector, which accounts for about two-thirds of the economy, dipped marginally in October although activity remained robust despite political uncertainty at the time.

The BNZ-BusinessNZ performance of services index fell 0.3 points to a seasonally adjusted 55.6 last month. All of the five sub-indices were above the 50 reading that separates contraction from expansion, however three fell in the month.

The PSI comes after its sister survey, the performance of manufacturing index, showed manufacturing activity continued to expand in October, down 0.4 points to 57.2 which economists described as a "solidly expansive level". The composite index, which combines the two surveys, slipped 0.2 points to 55.8 on a GDP-weighted basis and declined 0.1 points to 56.7 on a free-weighted basis.

Bank of New Zealand senior economist Doug Steel said the results were robust, "given the prevailing uncertainty surrounding the election, coalition negotiations, and government formation over the period. It was a similar story in last week's equivalent for the manufacturing sector. It is a positive start for economic growth in the final quarter of the year."

The survey's employment sub-index dropped 2.5 points to 51.2, which Steel said could reflect some election-period cautiousness and difficulty for some employers to find appropriate staff as the unemployment rate continues to drop.

"More broadly, it is interesting to see the PSI demand-side indicators like sales and new orders remain robust, while the supply-side indicators like employment and inventories have eased," Steel said. "It may represent productivity gains. Or it may be reflecting some building up of excess demand. Which it is bears thinking about as the consequences for inflationary pressure would be very different."

Stocks/inventories fell 1.6 points to 51.1 and supplier deliveries dropped 0.7 points to 52.8. Activity/sales rose 1.4 points to 58 and new orders/business advanced 0.3 points to 60.4.

Steel noted property and business services PSI was at an expansionary level of 54.4, marginally above its October long-term average of 53.6. He said while housing sales had fallen, the market isn't weak, as house prices have remained high and "houses are selling about as fast as normal if not a touch quicker."

Building consents have also increased recently, he said.