New Zealand’s services sector expanded for a fourth consecutive month in September, but growth remained marginal as businesses continued to exercise caution ahead of the general election.

The BNZ-BusinessNZ Performance of Services Index (PSI), a monthly survey-based gauge of activity across New Zealand’s service industries, recorded 50.9, down slightly from 51.0 in August but above July’s 50.5. Readings above 50 indicate expansion, while readings below 50 signal contraction. The latest result therefore keeps the sector in growth territory, although only narrowly.

The four-month run marks a turnaround after two years of contraction, a development that carries weight beyond the headline number given the services sector’s role as the largest part of New Zealand’s economy and workforce. However, the pace of recovery remains subdued and is still well behind manufacturing, where the equivalent Performance of Manufacturing Index has remained comfortably above 50 for some time, economists noted.

The individual components presented an uneven picture. New orders were the strongest component at 52.6, followed by inventories at 52.3, suggesting some forward momentum in demand. Supplier deliveries were below the breakeven level at 49.4, while employment stood at 49.8. The employment reading indicates that businesses are not yet sufficiently confident to expand staffing, leaving the recovery relatively narrow.

Business sentiment was little changed from August, with about 60% of respondents’ comments remaining negative. Businesses continued to cite the cost of living, fuel prices, interest rates and uncertainty surrounding the election as their main concerns.

BusinessNZ chief executive Katherine Rich described four consecutive months above the breakeven line as an encouraging run, despite the slight easing in the PSI in September. She said caution remained deeply embedded across the services sector, with many businesses taking a wait-and-see approach before the election. Rich suggested that this hesitation could limit any stronger recovery until the political outlook becomes clearer.

The latest reading leaves the services sector on a fragile footing. The contrast between relatively strong manufacturing and subdued services growth also indicates that the recovery is not yet broad enough to generate significant domestic inflation pressure.

A reading only slightly above 50 is unlikely to materially alter the outlook for the New Zealand dollar, which is influenced more by global risk sentiment and interest-rate expectations than by second-tier domestic surveys. Official releases on GDP, employment and inflation remain the primary reference points for policymakers and currency markets. The weak employment component and continued concern about interest rates point to an economy that remains sensitive to borrowing costs, supporting a cautious approach by the Reserve Bank of New Zealand.

Election uncertainty is likely to keep local economic data subdued until the result is known. The coming months will show whether businesses become less cautious after the election or whether cost pressures and high borrowing costs continue to restrain the recovery, regardless of which party forms the next government.

Source: ForexLive