20 Nov 2012

Economic bounce buoys business outlook

7:58 am on 20 November 2012

New Zealand's modest recovery may be back on track after a bout of weakness in the economy.

Activity in the services sector rebounded strongly, with the BNZ-Business New Zealand Performances of Services Index jumping 7.5 points to 57.4 in October after contracting slightly in the previous month.

A reading above 50 indicates the sector is expanding and follows a slight pick-up in manufacturing activity last week.

Sales hit its highest level since the survey began and new orders also surged, while employment rose modestly.

Recent weak inflation, jobs, and retail spending figures had increased speculation the economy went backwards in the September quarter.

But services account for about two-thirds of the economy, and BNZ senior economist Craig Ebert says that after weak retail spending and rising unemployment figures, the new data it indicates that the recovery remains intact.

Mr Ebert says the Reserve Bank's next move is likely to lift interest rates next year.

The combined services and manufacturing index indicated annual growth of about 3% in the future.

Business lobby takes heart

Business New Zealand says it is heartened by the new data, but wants to see those gains maintained for a few months more before it can say the recovery is back on track.

This monthly survey of firms providing services follows a similar survey of manufacturers which showed the sector clawing its way back from its worst run since 2009.

Business New Zealand chief executive Phil O'Reilly says taken together, the two surveys show the recent run of bad economic news may have been a blip.

However, he says it will take several more months of strong figures before he is fully convinced that the recovery is back on track.

BNZ economist Doug Steel says the surveys suggest that the economy rebounded in October following a soft patch after the middle of the year.