PSI downturn could signal ‘return to recession’

Kirk Hope says the August result showed "little in the way of a road to recovery".

BusinessNZ says the dip in August’s performance of services index – the third in succession – could signal a return to recession, clashing with Treasury’s moderate growth forecasts.

The index (PSI) came in at 47.1 for the month, below the baseline of 50, which indicates an expansionary service sector, down 0.9 points on the prior month and well under the long-term average of 53.5.

That was after slipping to 48.0 in July.

Kirk Hope, chief executive of the business advocacy group, said the August result showed “little in the way of a road to recovery”.

While employment, at 50.9, moved back into expansion mode, activity/sales remained well down at 43.4, and new orders/business (47.3) moved into its second month of contraction.

Supplier deliveries also moved into contraction, at 49.2, for the first time since November 2022.

In addition, the proportion of negative comments stood at 63.9 per cent in August, compared to 67 per cent in July and 55.6 per cent in June.

Kirk said negative sentiment was dominated by uncertainty regarding the general election, as well as continued adverse economic conditions.

BNZ senior economist Doug Steel said the PSI had mirrored last week’s performance of manufacturing index, with the combined index sliding to an average of 47.0 from 47.8 in July.

Steel said that the combined index suggests any bounce in GDP figures for the second quarter “will be short-lived and are consistent with economic contraction returning.

“In this sense, the PMI and PSI results are more consistent with the RBNZ forecast of a return to recession than the Treasury’s latest forecasts of moderate growth ahead”.

Steel said the lift in employment could reflect more labour supply via migration versus any underlying increase in labour demand.

“In any case, it shows another month where the PSI employment indicator has come in above sales and new orders.

The glass-half-full interpretation of this is that it shows supply-side expansion that will help take the heat out of inflation. On the other hand, it is not a good look for labour productivity.”