New Zealand’s services sector shows no signs of recovery, with the latest data revealing a tenth straight month of contraction. The BNZ – BusinessNZ Performance of Services Index (PSI) dropped to 47.9 in December, a further dip from 49.1 in November, and well below the critical 50-point mark that separates expansion from decline.
This extended slump has raised concerns about the country’s economic outlook.
Senior Economist Doug Steel described the situation as “a reality check” for the nation. “New Zealand has the only PSI in contraction among key trading partners,”
he said, noting that Australia’s PSI stood at 50.8 in December, signalling mild expansion, while the United States maintained robust economic performance.
Key Indicators Reflect a Struggling Economy
The PSI’s December reading is not just below the expansion threshold; it also pales in comparison to the long-term average of 53.1, highlighting the sector’s ongoing challenges.
Among the sub-indices, Activity/Sales saw a significant drop to 46.2, indicating deepening contraction. Stocks/Inventories fell to 48.8, and Supplier Deliveries declined further to 47.7.
The Employment Index offered a glimmer of stability, rising slightly to 47.4, its highest level since August 2024. However, New Orders/Business remained flat at 49.5, reflecting subdued business confidence.
BusinessNZ CEO Katherine Rich acknowledged the sector’s prolonged struggles. “The sector has now been in contraction for ten consecutive months, which has meant a tough 2024 for businesses trying to keep their heads above water during the wider economic recession,” she said.
Global Comparisons Show a Clear Contrast
New Zealand’s underperformance is particularly glaring when compared to key trading partners. Australia’s PSI of 50.8 signals a stabilising services sector, while the United States continues to outperform, driven by stronger economic fundamentals. This disparity has also affected the New Zealand dollar, with Steel attributing its December decline to
“contrasting economic fortunes between the US and NZ economy.”
Recession and Rising Living Costs Make Things Worse
Businesses in New Zealand are feeling the pinch from persistent economic pressures. Over 57% of survey respondents cited the cost of living and the broader economic climate as major concerns. These issues are exacerbating the contraction, with reduced consumer activity and rising costs straining productivity.
Historical data underscores long-term inefficiencies within New Zealand’s services sector. While services account for over two-thirds of the country’s economic activity, their productivity lags behind comparable industries in developed economies.
The Productivity Commission has identified significant gaps in areas such as ICT investment and capital intensity, which hinder growth.
“Evidence from the US retail industry and Australian wholesale trade industry has shown a significant relationship between ICT investment and productivity growth,”
a past Productivity Commission report noted. In contrast, New Zealand’s performance in these sectors remains poor.
A Long-Standing Problem with Productivity
The services sector includes industries with the lowest levels of labour productivity, such as tourism and wholesale services, according to the Productivity Commission. Even high-productivity sectors like information media and telecommunications struggle to achieve gains comparable to those in the US and Australia. This structural underperformance has far-reaching implications. The Commission’s analysis points to a shift in employment toward lower-productivity industries, which, while providing jobs, fails to boost overall economic performance.
A Call for Structural Reforms
The December PSI data highlights the urgent need for policy interventions to address the sector’s challenges. Experts suggest prioritising ICT investment, enhancing competitiveness, and reviewing occupational licensing rules to improve productivity.
New Zealand’s policymakers and industry leaders face the daunting task of reversing the services sector’s decline. The road to recovery will require a blend of immediate measures and long-term reforms, with the global economy presenting mixed signals.
“This is a wake-up call for New Zealand’s economy,” Steel emphasised.