July was a month to forget for local service sector businesses who had another quiet time, according to the BNZ-Business NZ performance of services index.
"For most local service sector businesses, it was a pretty forgettable July with a continuation of low consumer activity and the overhang of tougher economic conditions," Otago-Southland Employers Association chief executive Duncan Simpson said.
The Otago-Southland index was 40.1 in July, up from 36.1 in June but well down on the 55.9 recorded in July last year.
An index reading above 50 indicates the sector is generally expanding, and a reading below 50 indicates it is declining.
Nationally, the PSI reached 48.9, up from 45.6 in June but down from the 55.2 reading in July last year.
The best regional result for July was for the central region, which recorded an index reading of 54.9, up seven points from the previous month.
Mr Simpson said the good news in the local index reading was that employment levels were being maintained, an indication that there was still hope for better prospects soon.
The mood was also better than in the corresponding performance in manufacturing index: almost 40% of the service sample commented positively on business conditions, compared to 20% of manufacturers.
Bank of New Zealand economist Mark Walton said the squeeze being felt by the service sector was "illustrated in spades" by last Friday's retail sales figures.
June quarter real retail sales dropped for the second consecutive quarter, down 1.5% following a 1.2% fall in March.
"Though this wasn't hugely surprising, it would be a mistake to be too blase about the results," Mr Walton said.
"To put the declines in context, the last time we saw consecutive falls of such magnitude in the retailing sector was during the 1991 recession."
Trading conditions looked set to remain tough for a while longer, he said.
The labour market looked set to soften much more than it had over the first half of the year, posing significant risk to household incomes during the second half of the year.
Falls in housing wealth, a key driver of negative retail growth, had shown little sign of easing.
Prices of many staple goods, including food and utilities, continued to increase at rates in excess of nominal wage growth.
Mortgage rates remained high, even with the many official cash rate cuts priced into wholesale rates, and a weakening New Zealand dollar would see the cost of imported consumer goods lift.
However, it was not all one-way traffic.
The recent fall in petrol prices would help lessen the pressure on household disposable incomes, freeing up cash able to be spent elsewhere, Mr Walton said.
For retailers, it would be no surprise to see real sales contract again in the September quarter.
July's spending data for electronic card transactions and credit card billings, both due on Thursday, would give an early indication of retail spending.
"It wouldn't surprise to see these spending indicators creep back into positive territory. A failure to do so, as seems the risk, would simply underscore the extent of retail angst and reflect lower prices being heavily discounted by retailers in order to shift stock."
