Insights 
VT 
In May 2025, New Zealand’s Services Performance Index (PSI) stood at 44.0. This marks the lowest level of activity since June 2024, down from the previous 48.1 and falling below the long-run average of 53.0.
The decline follows a sharp fall in the Performance of Manufacturing Index (PMI), which dropped from 53.3 to 47.5. Both indices suggest a potential return to recession for the economy. Despite these indicators, the NZD/USD currency pair remained relatively stable following the data release.
New Zealand Economy Contraction
The figures just released point to a broader cooling down across both manufacturing and services sectors in New Zealand. A reading of 44.0 on the PSI signals that the majority of firms in the service sector are reporting contraction, not expansion. The drop from 48.1 may not sound dramatic at first glance, but with the long-term average positioned at 53.0, this gap reflects sustained weakness rather than just a bad month.
At the same time, the manufacturing data offer confirmation rather than contrast. A sharp move from 53.3 to 47.5 brings the index below the threshold of 50, the dividing line traditionally used to mark whether the sector is growing or shrinking. When paired with the service numbers, a pattern emerges that isn’t just about industry cycles but may imply broader economic struggles.
What’s perhaps more striking is the market’s reaction—or rather, the lack thereof. Despite data that would normally trigger currency movement, the New Zealand dollar held steady. It suggests that traders had anticipated poor results or were already positioned for downside risk. Alternatively, it may indicate that attention lies elsewhere at the moment, possibly with central bank policy or offshore developments dominating short-term sentiment.
Forecasting Economic Trends
Looking ahead, this gives us something quite precise. Both sectors—manufacturing and services—have now posted back-to-back weaknesses. In past cycles, this sort of dual-sector contraction has frequently preceded a dip in GDP, often translating into a technical recession if sustained for another quarter.
Therefore, we see scope for downward revisions to domestic growth forecasts in the near term. Market expectations around policy rates may also become more sensitive to forward-looking guidance. This is where tracking commentary becomes important: Not just the headline rate decisions, but what is being said about the future. Yield curves may begin to reflect increased probability of monetary easing, and this could start to price into short-term interest rate derivatives.
Given how central banks tend to respond with a lag to worsening macro data, there is room here for some speculation on timing. The services index does not resolve higher-frequency uncertainty, but it makes earlier hawkish projections harder to justify. If sentiment remains anchored around below-average confidence, volatility may increase in front-end contracts while demand for hedging could pick up.
On balance, one should treat the latest data points as more than single-month readings. Their direction, size, and relationship to long-term means all point towards worsening underlying momentum. Repricing risk is likely to be more visible on the rates side than in currency, assuming no additional surprises. If that dynamic holds, we may start to see larger flow into interest rate options, especially in structures protecting against near-term policy reversals.
Our positioning remains focused on how these numbers shift the forward curve, not just where spot values lie. Trading activity may favour approaches that capture skew generated from growing uncertainty, particularly in the 3- to 9-month horizon. The market may already be thinking along similar lines.
