New Zealand's service sector expanded for a third month, albeit at a milder pace, adding to signs the economy's recovery from recession will be gradual.

The BNZ-Business New Zealand Performance of Service Index (PSI) fell 1.3 points to 53.1 on a scale where a reading of 50 separates contraction from growth. New orders expanded 56.1, the first time since October the index has read below 60.

The survey showed a split between those who had a bumper Christmas and those that experienced a disappointing peak festive season. It follows government figures on Friday that showed the volume and value of retail sales climbed a tepid 1 per cent in the fourth quarter as competition for sales spurred price cuts.

"Discounting obviously helped boost sales volumes and cull inventories, but there's still some catching up to do to reach the optimistic expectation levels shown in market polls," said BNZ senior economist Craig Ebert. The gain in January's PSI "fell disappointingly short of soaring consumer confidence."

All five of the diffusion indexes in the PSI gained in the latest month, though the expansion abated compared to December.

Activity/sales fell to 53.1 from 55.1, down from 58.7, employment gained to 52.7 from 51.1 and stocks/inventories were unchanged at 50.3. Deliveries fell to 50.3 from 52.

Among service sectors, accommodation, cafes and restaurants sank to 50.6, while property and business services remained in contraction at 48.6. Transport and storage rose 2.2 points to 56.9 and retail trade was at 55.