New Zealand services expansion reaches four-month mark amid caution

The marginal 50.9 reading provides little impetus for the New Zealand dollar, which responds more strongly to global risk sentiment and interest-rate forecasts than to secondary indicators. Weak employment and ongoing borrowing-cost anxiety show an economy that remains responsive to interest rates, backing the case for the Reserve Bank of New Zealand to keep a cautious stance. The divergence between a robust manufacturing sector and a lacklustre services sector implies the recovery lacks the breadth to push domestic inflation higher. Pre-election uncertainty will probably keep local readings in this modest stretch until the ballot-box outcome is settled.

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The country's services industry is expanding once more, though barely, as companies hold back on spending until the election results are known.

• The BNZ-BusinessNZ Performance of Services Index posted 50.9 in September, following 51.0 in August and 50.5 in July.
• The period marks four successive months of growth, after two years of decline.
• New orders (52.6) and inventories (52.3) represented the top sub-indices, while supplier deliveries (49.4) and employment (49.8) fell short of the breakeven mark.
• Roughly three-fifths of respondents submitted negative remarks, similar to the prior month.
• Businesses highlight inflation, fuel costs, interest charges and electoral uncertainty as primary worries.
• Services expansion continues to run behind manufacturing, which has remained comfortably above 50 for an extended stretch.

September brought a fourth month of expansion for New Zealand's services sector, albeit a restrained one, against a backdrop of businesses exercising caution ahead of the general election, the BNZ-BusinessNZ Performance of Services Index (PSI) shows.

The gauge settled at 50.9, a slight dip from the August figure of 51.0 but ahead of July's 50.5. Since any number above 50 points to growth and one below signals contraction, the sector stays in positive, albeit narrow, expansion ground.

Four straight months above 50 represent a clear reversal after a two-year contraction phase. Still, the rate of growth is modest and trails the manufacturing industry, whose corresponding measure (the Performance of Manufacturing Index) has consistently sat well above 50 for an extended period, according to economists.

Under the surface, the data was mixed. New orders (52.6) and inventories (52.3) were the best-performing categories, hinting at some traction in future demand. Supplier deliveries came in at 49.4, the weakest, with employment close behind at 49.8, suggesting companies remain hesitant to recruit and the upswing depends on a narrow base.

Sentiment among businesses shifted little month-on-month, with roughly 60% of contributors offering negative views. Inflation, petrol costs, borrowing rates and election unpredictability were the leading issues cited.

Katherine Rich, BusinessNZ's chief executive, described the four-month stretch above the 50-point threshold as a promising sequence, even with September's small step back. She noted that caution is still firmly wired into the sector, with plenty of companies taking a wait-and-see position before the election, and proposed that such reluctance will probably limit any sharper recovery until the political landscape sharpens.

This outcome puts the services sector in a delicate position. With the election nearing, the near-term months will reveal whether company caution eases once the results are in, or whether cost burdens and elevated loan expenses hold back the upswing irrespective of which party leads the next administration.