Services sector suffers contraction

Service sector slips into contraction territory for the second time in three years. Photo / CityLife North

A barometer of activity in the services sector, which comprises 69 per cent of the economy, has slipped into contraction territory for only the second time in the past three years.

The BNZ-Business New Zealand performance of services index (PSI) fell for the fourth month in a row in September to 49.6. It has been below 50 - the frontier between expansion and contraction - only one other time (July 2010) since mid-2009.

The new orders indicator fell for the fourth month in a row, to its lowest level since July 2010. The employment and activity/sales gauges are, like the overall index, pointing to contraction.

BNZ economist Doug Steel said yesterday's PSI was the latest indicator pointing to slower economic growth in the second half of this year, after a solid performance in the first half.

The companion performance of manufacturing index (PMI) released last week has been in contraction territory for four months in a row.

The New Zealand Institute of Economic Research said its September quarterly survey of business opinion was consistent with economic growth decelerating to an annual pace of about 1.5 per cent in the second half of the year, compared with growth of 2.6 per cent in the year to June.

And the International Monetary Fund has just cut its forecast for world growth this year to 3.3 per cent, from 3.8 per cent last year and 5.1 per cent in 2010.

The financial market has fully priced in a 25 basis point cut in the official cash rate by the middle of next year.

But BNZ economists disagree. "Positive signals coming from the likes of the housing market, warming credit growth and an upwards trend in building consents argue against applying more monetary stimulus at this point," said Steel.