New data is raising doubts about how soon New Zealand’s recovery will arrive
New Zealand’s services sector showed further weakness in August, with economists warning the country’s economic recovery may take longer than expected and interest rates could fall below current forecasts.
The Performance of Services Index (PSI) dropped to 47.5 in August from 48.9 in July, according to research released by Bank of New Zealand on Monday. Any reading below 50 indicates the sector is contracting.
While the three-month moving average improved slightly from 46.9 to 48.0, BNZ economists Doug Steel and Matt Brunt said this provided little cause for optimism.
“Across the economy, we still believe the general signs of a turning point are there,” Steel and Brunt wrote in their analysis. “However, there is a very real risk any ensuing bounce takes longer than currently expected.”
The disappointing services data raises questions about the pace of New Zealand’s economic recovery. BNZ has forecast a 0.5% quarterly contraction for second-quarter GDP, which is due for release on Thursday. The bank revised this estimate down from negative 0.2% following weak business financial data released last week.
The services sector weakness suggests BNZ’s forecasts for economic recovery may be too optimistic, the economists noted. The combined manufacturing and services activity indicator sits at 46.4, well below the 53 level economists say would be consistent with their year-end GDP forecasts.
BNZ expects the Reserve Bank of New Zealand to cut the Official Cash Rate by 25 basis points in both October and November, bringing it to 2.50%. However, the weak services data increases the risk that rates may need to fall even lower.
“The balance of risk to our interest rate forecasts (by a slim margin) is that the Official Cash Rate may need to go lower than the 2.50% we have forecast,” the economists said.
The services index has remained below 50 for 18 consecutive months, indicating prolonged weakness in the sector. All five components of the PSI – activity/sales, employment, new orders/business, stocks/inventories, and supplier deliveries – averaged higher in the first two months of the third quarter compared with the second quarter but remain well below their long-term averages, according to the report.
Despite forecasts for modest economic improvement, Steel and Brunt warned it would “take time before it feels anything close to normal” for New Zealand businesses and consumers.
What are your thoughts on the latest findings? Share your insights in the comments below.
