New Zealand's Services Sector Shows Signs of Life: Positioning for Equity and Currency Gains Ahead of Q3

The New Zealand services sector's contraction in June 2025 slowed marginally, offering a glimmer of hope for investors amid prolonged economic stagnation. The BusinessNZ Performance of Services Index (PSI) rose to 47.3 from a revised 44.1 in May, marking the fifth consecutive month of contraction but signaling a potential inflection point. While the sector remains in negative territory—below the 50 expansion threshold—the easing contraction rate suggests resilience against headwinds like high interest rates, weak consumer confidence, and seasonal tourism lulls. This slowdown in the contraction's pace could catalyze a recovery in rate-sensitive industries, presenting contrarian opportunities in equities and currency plays.

The Services Sector's Fragile Turnaround

The June PSI data reveals a mixed but cautiously optimistic picture. Sub-indexes such as Activity/Sales (44.5) and New Orders/Business (48.8) remain in contraction, while Stocks/Inventories (50.6) expanded for the first time since late 2024—a critical sign of restocking optimism. Employment, however, continues to struggle, with its sub-index at 47.2 for the 19th straight month of decline, underscoring lingering labor market fragility.

BNZ Senior Economist Doug Steel notes that the sector's “prolonged sub-50 readings” delay the recovery timeline, but the marginal improvement in June hints at stabilization. The Q2 GDP data, which may show a second consecutive quarter of expansion (0.8% growth in March 2025), reinforces this narrative. While GDP per capita remains in decline, the services sector's decelerating contraction rate aligns with a broader economic bottoming-out process.

Labor Markets and Consumer Sentiment: Lagging but Improving?

The employment sub-index's persistent weakness suggests that hiring lags behind activity improvements—a common post-recession pattern. However, the Services Sector Workforce Survey indicates a 3% uptick in part-time job postings in June, particularly in tourism and hospitality, which may foreshadow full-time role rebounds as demand recovers.

Consumer sentiment, though still muted, shows tentative signs of life. The Westpac-Melbourne Institute Consumer Sentiment Index edged up to 98.5 in June from 96.2 in May, driven by optimism around inflation easing. This shift, paired with the RBNZ's hinted policy flexibility (markets price a 50% chance of an OCR cut by mid-2025), could boost household spending and retail activity in coming months.

Currency Plays: NZD's Turnaround Potential

The New Zealand dollar (NZD) has underperformed in 2025, down 4% against the USD year-to-date amid global rate hikes and domestic inflation pressures. However, a services sector recovery could reverse this trend.

A sustained PSI rebound above 50 would signal improved economic confidence, potentially prompting the RBNZ to pause or reverse rate hikes. Even a modest OCR cut could lift the NZD by 2-3% against the USD, as investors reassess the currency's risk premium. Additionally, improved trade balances—if tourism and export-driven services recover—would further support the currency.

Equity Opportunities: Targeting Tourism Infrastructure and Fintech

For equity investors, the services sector's rebound offers two compelling sub-sector plays:

1. Tourism Infrastructure:
   Companies with exposure to tourism recovery—such as airport operators, hotel chains, and travel tech platforms—could benefit as global visitor numbers rebound. New Zealand's tourism sector, which accounts for 10% of GDP, has seen domestic spending rise 5% year-on-year despite weak inbound travel. Look for firms with pricing power and diversified revenue streams, such as Air New Zealand (code: NZ) or SkyCity Entertainment Group, which operates casinos and hotels.

2. Fintech and Digital Services:
   The Services PSI's Stocks/Inventories expansion hints at digitization efforts to streamline operations. Fintech firms enabling cashless payments, cross-border transactions, or SME financial tools—such as Xero Limited (ASX: XRO) or PayPal's regional partners—may see rising demand as businesses adapt to post-pandemic consumer habits.

Timing the Contrarian Play: Q3 Earnings as a Catalyst

The optimal entry point lies in the coming weeks, ahead of Q3 earnings releases in late July/August. Analysts expect companies like Auckland International Airport (ASX: AIA) and The Warehouse Group (NZX: TWM) to report stabilization in traffic and sales volumes, respectively. A positive earnings surprise could trigger a re-rating of sector multiples, especially if the September PSI breaches 50.

Risks to the Thesis

• Inflation Persistence: A resurgence in wage-price spirals could force the RBNZ to delay easing, hampering recovery.
• External Shocks: Global demand (e.g., U.S. recession fears) or commodity price spikes could reignite contractionary pressures.

Conclusion

New Zealand's services sector is at a pivotal juncture. While challenges like labor shortages and high interest rates persist, the slowing contraction rate and tentative consumer optimism suggest a bottoming-out process. Investors should position now for a recovery in tourism-linked equities and a NZD rebound, with Q3 earnings acting as a key catalyst. As the old adage goes: “Buy when there's blood in the streets”—and the June PSI data indicates the sector's “blood” may finally be drying up.