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Across the country the March result was the lowest in more than six years and will be closely followed in the months ahead to gauge any further weakening in the economy.
Nationally, the index eased back 0.7 points to 52.9, only Otago Southland of the four regions below 50 points; which signals contraction, while above 50 is expansion.
The BNZ-BusinessNZ service index for the South fell from a healthy 59.2 points in February to 40.7 for March.
Otago Southland Employers Association chief executive Virginia Nicholls said the southern regional breakdown in categories dipped into contraction in the categories of orders/new business and also activity/sales levels; reflecting the same scenario seen in the national data.
''This is a significant drop, and it's too early to know if this is a downward trend, or a short-term glitch,'' she said.
While events were still attracting good numbers of tourists, Mrs Nicholls said the tourism sector delivered mixed feedback from across the region.
''The closure of the West Coast road after a significant weather event at the end of March did affect the number of tourists coming into Central Otago,'' she said.
BusinessNZ chief executive Kirk Hope said there were two ''concerning elements'' which contributed to the easing with new orders/business declining to 54.9, its lowest point since September 2012, while activity/sales slipped to 52.5.
''All eyes will be on these key results in the months ahead to ascertain whether expansion continues its downward trend,'' Mr Hope said.
Mrs Nicholls reiterated several ongoing issues faced by southern businesses, which included concerns around rising costs, employment relations changes and continued difficulty finding skilled and unskilled staff.
The service index sister survey, the performance of manufacturing index, released last week, showed manufacturing activity continued to expand, but at the slowest pace since July last year as production and new orders eased, BusinessDesk reported.