Services awaiting recovery in consumer confidence
According to the BNZ – BusinessNZ Performance of Services Index (PSI), the services sector in New Zealand contracted again in May.
The PSI for May was 47.5 (where a reading above 50.0 indicates the sector is generally expanding, and a reading below 50.0 indicates the sector is in contraction). The PSI reading for April was 48.7.
BusinessNZ's CEO, Katherine Rich said "It is frustrating to see the services struggle, but it is difficult to see how the sector's fortunes will turn around quickly. The industries within the sector that were weakest in May were those, like Cafes & restaurants and Recreational & personal services, that rely heavily on discretionary expenditure by consumers. People are still very wary of spending unless it cannot be avoided."
Just over two-thirds of the respondents' comments about the influences on their business environment were negative, about the same as in April. The comments frequently related to rising costs, especially for fuel, and weak demand linked to lack of consumer confidence.
All five of the PSI sub-indices were below 50.0, with the weakest being the sub-index for Activity levels and sales, which is a mark of how subdued the sector is currently. The least weak was for Supplier deliveries, which at least means that it should be possible for the sector to respond quickly to any pick-up in demand.
BNZ Senior Economist, Doug Steel said "The PSI has oscillated in contractionary territory over recent months, dipping to 47.5 in May from 48.7 in April. It indicates a sector struggling to get its head back above water."
Slipping under water
According to the latest BNZ - BusinessNZ Performance of Manufacturing Index (PMI), New Zealand's manufacturing sector contracted slightly in May.
The seasonally adjusted PMI for May was 49.9 (where a reading above 50.0 indicates that the manufacturing sector as a whole is expanding, and a reading below 50.0 indicates a contraction). This was down from 50.4 in April and 52.8 in March. The long-term average for the index is 52.5.
BusinessNZ’s Director of Advocacy, Catherine Beard said: "It is disappointing to see the PMI slip back into negative territory, even though the reading was only just under 50.0. Manufacturers are obviously struggling in the face of a combination of adverse influences, including lack of customers demand, high fuel prices and the conflict in the Middle East".
The sub-indexes of the PMI suggest that firms are adding to their stocks of finished goods (53.8) and getting deliveries out of the door (51.9), but the production, employment and new orders sub-indexes were all flat, at around 50.0.
The results also showed that micro-firms (0-10 employees) were struggling the most, with a sub-index reading of just 46.0. However, at the other end of the scale, large firms (101+ employees) were performing strongly, with a sub-index reading of 57.6.
BNZ Head of Research, Stephen Toplis, said "We believe the sector is likely to go through a flat patch during winter but, Middle East willing, we still think the broader economy can pick up some momentum at the tail end of this year so there is no reason to believe manufacturing will be an exception."
Q1 GDP Preview
Q1 GDP data have a sense of being old news, especially given developments in the Middle East over recent months. But the data will set the starting position for the economy, so is worth keeping an eye on when it is released next Thursday 18 June.
We have been constructive on Q1 GDP growth. The early partial indicators like retail sales and international trade came in near enough to expectations.
Then last week’s building work data produced a shockingly weak outcome seeing us tab down our GDP view a couple of ticks. The weak building result also put the onus on today’s business financial data to deliver indication of reasonable gains in value added across the manufacturing, wholesale trade, and wider services industries to maintain our thoughts of decent GDP growth in the quarter.
Today’s data delivered and then some. Like much data recently there was a lot of noise, but the undercurrent was a clear lift in activity in the quarter.
It is strong enough to see us finalise our Q1 GDP forecast at 0.9%, where it was before last week’s soft building data saw us nudge it lower.
Fiscal fortitude
Surpluses sooner . . .
The government went into this Budget hell-bent on proving to the electorate, and the rating agencies, that it could return its core operating balance (OBEGALx) to surplus and, in so doing, start lowering the debt track in a meaningful way. In this regard the 2026 Budget fully delivers.
A Hawkish Hold
In our contribution to NZIER’s Shadow Board, in advance of today’s Monetary Policy Statement, we said: “The RBNZ has no choice but to tighten. The question is when. We think it should be moving interest rates to neutral as soon as possible. We also think it won’t.”
As it turns out this is precisely what happened. The cash rate was left at 2.25% and it is very clear the RBNZ doesn’t think interest rates need to rise just yet. What we hadn’t considered was that the independent members of the Monetary Policy Committee would be so adamant that rates should be hiked now.
Retail Sales Hot and Cold
The headlines read that Q1 retail sales were strong. However, we think describing sales as strong or weak depends very much on how you look at it.
Sure, the 0.9% seasonally adjusted lift in retail sales volumes was stronger than the market consensus of a 0.5% gain. However, it was not quite as strong as the 1.2% we had pencilled in. Core sales rose a solid 1.0%.
Q1’s lift adds to the evidence that the economic recovery was gaining some steam before the start of the conflict in the Middle East. Retail sales volumes were 4.5% higher than a year earlier.
BNZ & SEEK Employment Report: Signs of hiring caution accumulating
There are accumulating signs of caution creeping back into the job market. In April, SEEK job ads eased 0.7% m/m in seasonally adjusted terms. Not a large change but it follows a similar sized dip in March.
Fuel prices impacting service sector performance
According to the BNZ – BusinessNZ Performance of Services Index (PSI) the services sector in New Zealand contracted in April, albeit more slowly than in March.
The PSI for April was 48.9 (where a reading above 50.0 indicates the sector is generally expanding, and a reading below 50.0 indicates the sector is in contraction). The PSI reading for March was 46.2.
BusinessNZ's CEO, Katherine Rich said "More than two-thirds of the respondents commented that the factors influencing their business during the past month were negative, and many of the comments focused on fuel prices. With the continuing conflict affecting shipping through the Strait of Hormuz, it is difficult to foresee a quick return to expansion in the sector."
Despite the generally weak performance of the sector, the New Order sub-index was in expansion, at 51.2. However, all four of the other sub-indexes were showing contraction, with the weakest being Supplier Deliveries at 46.6.
Micro-businesses (those with 1-10 employees) were finding it particularly tough in April, with their sub-index reading at 44.4, but Medium-Large firms (with 51-100 employees) seem to be in healthy expansion at a sub-index level of 55.5.
BNZ's Head of Research, Stephen Toplis said that "At first glance the jump in the headline index from 46.2 in March to 48.9 in April might be read as hope the New Zealand economy is proving to be remarkably resilient to the war in the Middle East. On the other hand, it could be interpreted as further evidence the economy is struggling to get its head above water."
Holding on to expansion
According to the latest BNZ - BusinessNZ Performance of Manufacturing Index (PMI), New Zealand's manufacturing sector was expanding in April, but the expansion was only marginal.
The seasonally adjusted PMI for April was 50.5 (where a reading above 50.0 indicates that the manufacturing sector as a whole is expanding, and a reading below 50.0 indicates a contraction). This was down from 52.8 in March and 54.6 in February. The long-term average for the index is 52.5.
BusinessNZ’s Director of Advocacy, Catherine Beard said: " The proportion of respondents highlighting negative influences on their business performance was 63.6%, compared to 62.0% in March. And many of the comments focused on the effect of the war against Iran on freight and fuel costs, as well as its impact on deliveries of raw materials."
The strongest sub-index was Employment, at 53.4. The Production levels sub-index was 51.7, while the Stocks of Finished Products sub-index was 50.5. Of concern for future results, the other two sub-indexes were in contraction, with New Orders at 48.2 and Deliveries of Raw Materials sub-index was 46.5.
Micro-firms (i.e. those with 1-10 employees) are clearly finding it hard going, with a sub-index level of only 39.2. However, the sub-indexes for respondents in each of the other size groups were all above 50.0, with Medium-Large firms (51-100 employees) strongest, at 56.8.
BNZ Head of Research, Stephen Toplis, said "The Performance of Manufacturing Index had been remarkably robust with the headline reading for March down on previous months but still solidly above the breakeven line. However, we feared it was only a matter of time before the wheels started to fall off and, alas, the April survey indicates that time may now have arrived."
Pre-conflict labour market unsurprising
Today’s Q1 labour market data was always going to have a dated feel to it given it largely pre-dated the conflict in the Middle East. It was going to take a set of numbers materially different to expectations to meaningful move financial markets. That didn’t happen.
We thought the data would show labour market slack and it did, judging by the full mix of indicators.
The unemployment rate did ease a point to 5.3% in Q1 from 5.4% in Q4. That was a tick lower than market expectations and two ticks lower than what we had pencilled in. It matched the RBNZ’s February MPS pick.
Intense cost pressure
We had a feeling that today’s April ANZ Business Opinion survey was going to look generally weaker than the March results but not as weak as the late March responses.
That is indeed what a lot of the headline indicators revealed, including firms’ own activity expectations, business confidence, profit expectations, and investment intentions.
In late March there was intense fear as fuel prices had been rocketing higher and concerns grew around security of fuel supply. Some of that intensity has eased. While significant risks remain as crude oil is today back near post-conflict highs, domestic fuel prices are well off their highs.
Even if the intensity of concern from late March has eased a touch, businesses are under duress. Confidence and profit expectations are negative, as cost expectations continue to lift.
BNZ & SEEK Employment Report: Jumbled jobs picture
In March, SEEK job ads eased 0.7% m/m in seasonally adjusted terms. While changes in economic indicators are quickly being attributed to the Middle East conflict, we are cautious to jump to any strong conclusions here. It is possible the fall in ads has been brought about by the war and rise in uncertainty, leading some firms to put hiring plans on hold. It is also possible that it is too early to see these impacts, and March is just typical monthly variation. The trend in ads is still moving higher, lifting 3.5% in Q1.
Muddy waters no less muddy
NZIER’s April Quarterly Survey of Business Opinion (QSBO) is nothing but a tease. The real story that we want insight on is “how has the war in the Middle East impacted business expectations”. Alas, it provides nothing of the sort.
The survey was conducted across the month of March and into early April. At the beginning of March most New Zealand businesses were relishing the prospect of a sustained period of improving economic activity. By the end that view of the world had been completely upended.
This shift in perceptions was highlighted by NZIER with its breakdown of business confidence across the period. It showed that early survey respondents were net 34% positive about the general business situation. Four weeks later a net 57% were negative.
Oil inflation makes first appearance
There were three messages in today’s monthly price indices:
• rising fuel prices are already pushing headline inflation upwards
• food price inflation is softer than we expected
• we have no idea how to forecast airline prices on a monthly basis.
It was a pleasant surprise to see food prices fall in March. The -0.6% movement for the month was a long way from the modest increase we had assumed. There were two key reasons for this: fresh fruit and vege prices fell (especially kiwifruit) and anyone who does the regular shop would have noticed that cheese prices are well down from their peaks.
Annual food price inflation fell to 3.4%, its lowest reading since February 2025. The good news is that a better growing season for fresh fruit and veges will keep a cap on food price inflation for a few months as will last year’s drop in the international price of dairy products. But that’s where the good news ends. Global dairy prices have since rebounded and the broader food sector will be impacted by rising fertiliser, diesel and transport costs.
We expect annual food price inflation to start climbing again in the second half of this year.
Services sector struggling
The services sector in New Zealand contracted in March, according to the BNZ – BusinessNZ Performance of Services Index (PSI).
The PSI for March was 46.0 (A PSI reading above 50.0 indicates that the service sector is generally expanding; below 50.0 that it is declining). This was 1.6 points lower than in February and 6.6 points lower than the average of 52.8 over the history of the survey.
BusinessNZ's CEO, Katherine Rich said "The services sector in New Zealand is clearly feeling the effects of the conflict in Iran. The industries that deal mainly in discretionary spending (Accommodation, cafes & restaurants; and Cultural, recreational & personal services) have been especially impacted, and this is likely to reflect a lack of consumer confidence."
All five of the sub-indexes had readings below 50.0, and the weakest was the Activities/Sales sub-index at 44.6.
The generally downbeat mood of the sector was further evident in the proportion of negative comments from respondents. 69.1% of the comments were negative (compared to 56.4% in February). Unsurprisingly, many of the comments cited the effects of the conflict.
BNZ's Head of Research, Stephen Toplis said that "So poor was the PSI reading that our combined PMI/PSI indicator is suggesting the economy could soon be contracting. While we are not forecasting a recession, these data support our recent decision to significantly downgrade our growth expectations for 2026."
Still expanding, but war clouds the outlook
According to the latest BNZ - BusinessNZ Performance of Manufacturing
Index (PMI), New Zealand's manufacturing sector was expanding in March,
albeit at a slower rate than previously.
The seasonally adjusted PMI for March was 53.2 (a reading above 50.0
indicates that manufacturing as a whole is expanding, below 50.0 that it is
contracting). This was down from 54.8 in February and 55.0 in January, but
still above the long-term average of 52.5.
BusinessNZ’s Director of Advocacy, Catherine Beard said: "It is gratifying to
see that the manufacturing sector is still expanding but, at the same time, it
is concerning to note that the proportion of businesses commenting
negatively about their situation increased to 62.0%, from 44.5% in
February." The comments showed that the war in Iran, and its wider
consequences, are weighing heavily on the minds of the respondents.
Despite the downturn in confidence, the New Orders sub-index was the
strongest, at 55.8. The weakest was Deliveries of Raw Materials, at 50.0. The
sub-index for Production was 53.8, the sub-index for Employment was 51.4,
and the sub-index for Stocks of Finished Products was 54.0.
BNZ’s Senior Economist Doug Steel said that "The PMI result supports our
view that economic growth was reasonable in the first quarter of the year,
even though material headwinds had accumulated by quarter’s end."
RBNZ the Inflation Busters
Forget Ghostbusters and welcome the Inflationbusters. If you hadn’t worked it out yet, RBNZ Governor Breman today reinforced the fact that her world revolves around getting inflation back to the 2% mid-point of the Bank’s target band come what may.
RBNZ’s textbook response to Iranian fallout
Dr Anna Breman’s speech on the impact of the Middle Eastern conflict was one of the most watched in recent history. Financial markets were looking for a clear indication of the Bank’s thoughts and what it might mean for monetary policy settings. In contrast, it was our view the new Governor would play a very straight bat. And while the Swedes are not well known for their cricketing prowess, she provided the Black Caps with a very clear lesson as to how that should be done.
BNZ & SEEK Employment Report: Job ads gathering momentum
It was more of the same in the February job ads data. They are trending higher and building momentum, albeit off a low base. Ads for the latest three months (Dec – Feb) are 3.9% above the previous three months (Sep - Nov). Combined with the modest lift in January filled jobs, the labour market is continuing to recover in early 2026. This is consistent with our economic forecasts. We will continue to monitor the conflict in the Middle East, which is more likely to dampen, rather than stop employment growth.
Economy grows, slowly
Whatever today’s Q4 GDP growth turned out to be it was always going to come with a proviso that it was a different world late last year compared to what we are now living in. Historical data are of much less importance compared to the news flow from the Middle East.