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NZ services sector activity rises to six-month high in January

New Zealand's services sector activity rose to a six-month high in January as record inward migration boosted demand for housing, increasing the need for property-related services.

The BNZ-BusinessNZ performance of services index rose 1.1 points to 57.8 last month from December. The service sector, which accounts for about two-thirds of the economy, has been growing since July 210, based on the PSI, where a reading above 50 indicates expansion.

Across the PSI's sectors, three out of four were in expansion. Activity in property and business services showed the only increase at 53.6 in January. Wholesale trade dropped 9.3 points to 53.8, accommodation, cafes and restaurants fell 6.8 points to 54.1, and health and community services slipped into contraction with a reading of 49.5.

Last year, New Zealand's burgeoning economy attracted a record influx of people at the same time as fewer kiwis depart for Australia, given the comparatively weaker outlook for the Australian economy. That helped push up local demand for items such as vehicles, where sales rose to a record last year, and kept wage inflation low. The central bank is keeping a close eye on the effect on the housing market amid concerns that a lack of supply will cause house prices to spike, creating financial instability.

"The relative health in the latest PSI gels well with a burgeoning labour market, high net inward migration and a reheating housing market," BNZ senior economist Craig Ebert said in a note. "It's a big relief to see the PSI get even stronger in January, compared to the abrupt slowing of its manufacturing cousin the PMI."

Last week the performance of manufacturing index dropped to a two year low last month, from a decade high in December, with all four regions across New Zealand in contraction, while production declined for the first time in two-and-a-half years. The performance of the composite index, which combines the services and manufacturing indices, was little changed at 56.8 on a GDP-weighted basis, while it decreased 2.3 points to 54.7 on the free-weighted measure.

"The 6.9 point gap between the PSI and the PMI (50.9) was unusually large in January, giving mixed messages about the economy," Ebert said. "However, we note that on the handful of previous occasions when the gap has been at least this big, the PMI has posted a decent rebound the very next month - more often than not a sizable one."

All five main sub-indices in the PSI were in expansion for an eighth month. New order/business rose 0.5 points to 61.4 reading in January, while activity/sales recorded the biggest gain up 2.7 points to 60.2. Employment rose to 54.5, while supplier deliveries eased to 55.8 and stock/inventories fell to 53.9.

Northern region activity dropped 5.1 points to 52.5, while the central region climbed 10.1 points to a six month high of 60.1. Canterbury/Westland increased 5.8 points to 57.3 and Otago/Southland slipped to 64.7.