The largest part of the economy is stuck in reverse
New Zealand’s services sector accounts for nearly three-quarters of GDP. It employs the bulk of the workforce. And it has been contracting for an extraordinarily long time.
The BNZ-BusinessNZ Performance of Services Index, which tracks activity across the sector, has a long-term average of around 53. Anything below 50 signals contraction. In September 2025, the PSI came in at 48.3, marking the 19th consecutive month below the expansion line. The sector last expanded in February 2024.
By March 2025, the headline reading was 49.1, still below 50, and the pattern of brief improvements followed by renewed weakness had already become familiar. The data since September 2025 is consistent with continued contraction, with background reporting suggesting readings have dipped as low as 46.0 in some months.
But the headline PSI is not the worst of it.
Employment has been negative for almost the entire period
The employment sub-index tells a story that deserves far more attention than it has received. By the time the March 2025 data was published, the sub-index had just posted 50.2, described by BusinessNZ as the highest reading since November 2023 and the end of 15 consecutive months of employment contraction.
That single month of marginal expansion was the only reprieve. By September 2025, employment had fallen back to 47.8, well into contraction territory. Background data from subsequent months shows readings of 47.2, 46.4, and 48.2, all negative.
Add it up and services employment has been contracting for approximately 29 of the last 30 months, with only a single month of barely positive expansion breaking the streak. That is not a cyclical dip. It is a structural pattern that the headline unemployment figures have not yet fully absorbed.
Demand is the problem, not supply
The consistent message from businesses surveyed in the PSI is not about regulation, input costs, or supply chain disruptions. It is about demand. In September 2025, 63% of respondents cited demand as their primary constraint. The share of negative comments was 58.0%, down slightly from 59.6% in August but still reflecting deeply pessimistic sentiment. In March 2025, the negative share was 56.7%.
This is a consumer confidence and household income problem. Service businesses that depend on discretionary spending have been squeezed by the cost of living, elevated interest rates, and weak consumer sentiment for over two years. Rate cuts have not changed the picture.
Rate cuts have not fixed this
The Reserve Bank cut the OCR by 25 basis points to 3.50% at its April 2025 review, continuing an easing cycle that was supposed to stimulate activity. The services sector has not responded. The GDP-weighted Composite Index, which combines the PSI with the manufacturing PMI, was at 48.5 in September 2025, marking its eighth consecutive month of contraction.
For a sector that makes up three-quarters of the economy, persistent contraction despite monetary easing raises uncomfortable questions about how much of the damage is cyclical and how much is structural. If lower rates were going to trigger a services recovery, there should be some evidence of it by now.
The labour market implications are coming
The PSI’s employment sub-index is a leading indicator. It captures staffing decisions that businesses are making now, before those decisions flow through to official unemployment statistics with a lag of one to two quarters.
When nearly 30 months of services employment data shows contraction, the implication is clear. Service businesses have been cutting hours, not replacing departures, and holding off on hiring for the better part of two and a half years. That reality will eventually surface in the Household Labour Force Survey, and when it does, the numbers will not be a surprise to anyone who has been watching the PSI.
New Zealand’s services sector also underperforms its key trading partners on this measure, suggesting the weakness is not simply a global phenomenon but something specific to domestic conditions.
For business owners waiting for the recovery to arrive, the data offers a blunt assessment. The brief expansion in late 2024 lasted two months. The brief employment recovery in March 2025 lasted one month. Every uptick has reversed. Until consumer demand genuinely recovers, not just interest rates falling but households actually spending, the services sector will remain the economy’s weakest link. And the jobs data will eventually catch up.