The ugly numbers showing why Auckland and Wellington have been in recession for two-and-a-half years – Inside Economics

That might need some explaining, but bear with me.

The Performance of Service Index (PSI) doesn’t usually make front-page headlines.

But this week it grabbed attention, largely (to be honest) because of the commentary from BNZ head of research Stephen Toplis.

He looked at the combined reading of the PSI and the Performance of Manufacturing Index (PMI) for April and said they showed the economy is stalling.

“The economy is stalling” is a very clickable headline, so the indices (which are produced in combo by BusinessNZ and the BNZ) got about 10 times as much attention as they normally do on the Herald website.

That’s great because they offer one of the best indicators of how it is tracking.

They are based on surveying businesses.

But unlike confidence surveys, which focus on how firms are feeling and what they expect in the coming months, the PSI and the PMI ask businesses about the volume of business they’ve done, the orders they have in place, new orders and new business gained and the level of new hiring (or firing) they have done.

The PSI in particular tells the story of why New Zealand’s two major cities are so miserable.

The services sector is essentially anything that isn’t farming, fishing, mining or manufacturing.

Although there are some great manufacturers in those cities, they are overwhelmingly service economies.

The service sector includes retail, hospitality, gyms, hairdressers and cinemas.

It’s real estate services and it’s local government.

It’s lawyers, consultants, architects, engineers, IT firms, marketing agencies, PR, surveyors and auditors.

It’s trucking, courier and delivery services, taxis and rideshare, storage and logistics and freight forwarding.

It’s banks, insurance companies, mortgage brokers, financial advisers, accountants and KiwiSaver providers.

In other words, it’s not just woke, non-productive jobs. It’s important stuff that makes the country functional and society a pleasant place to live.

As an economic indicator, the PSI essentially strips out the parts of the economy that have propped up gross domestic product (GDP) for the past three years.

Agriculture has been booming because of high export prices.

The manufacturing sector (often tied to food processing) did it tough with the rest of the economy and contracted through 2023 and 2024. But it managed to creep back into expansion territory in July last year and has been there ever since.

The services sector has been much worse.

Prior to December 2025, it experienced 21 negative months in a row.

We had two months of expansion in December and January – which had a lot of economists and me optimistic about a recovery this year.

But the Iran war put paid to that. The sector has been back in contraction since February.

I know this is aggregated data but they sure match the anecdotal experiences we are hearing from Auckland and Wellington businesses.

Most of them have seen recessionary conditions for 24 months out of the last 26.

BNZ’s Toplis points out that the numbers look worse if you look at the PSI’s employment sub-index.

It has been below “the break-even” mark for 29 consecutive months.

“It should be of no surprise that over the last two years, the unemployment rate has climbed from 4.4% to 5.3% and is likely to rise further,” Toplis said.

I’d add that this also makes it clear why Auckland’s unemployment rate (6.3%) is so much worse than the national average.

Toplis also makes the point that the length of time that reported hiring has been weak explains why the unemployed are remaining unemployed for an increasing length of time.

He points out that this is now much worse than the Global Financial Crisis (GFC), after which the same PSI employment metric was negative for just 19 months (still pretty horrible, to be fair).

None of this is very fun news, especially with the inflationary shock from high oil prices expected to flow through to food and other consumer goods in the coming months.

Let’s move on and answer a reader’s question ...

Hi Liam,

Given the widening global inequality, do you think the restricted access to affordable credit for “high-risk” communities – as contrasted with the easy availability of credit for the wealthy – is a primary driver of this trend?

It seems to me that levelling this playing field may be more impactful than measures like tax cuts.

It has been said that the wealthy have the luxury of investing in the future, and the poor are focused on day-to-day survival. Is credit a tool that could bridge that gap?

I would be interested to hear your thoughts.

Thanks,

Gabriel Forrester

Thanks Gabriel,

It’s an interesting question. You are right, it does seem like there is a poverty trap based around credit.

Basically if you have wealth to start with, you can get relatively cheap credit to invest in property or even business.

So the wealthy are able to borrow at the lowest rates and can use that leverage to create even more wealth.

Meanwhile, for the poor, credit (if they can get it) comes at a much higher price.

The contrast is stark. If you have enough equity, you can borrow from the bank with an interest rate as low as 4.59% right now.

That investment will probably be in a property, which (give or take the current market malaise) will eventually rise in value.

If you need $1000 to keep your car on the road but you’re completely broke, you could borrow on a credit card at about 20%.

Or, if you can’t access a credit card, you could go to a payday lender.

They can charge interest at up to 0.8% a day, which might not sound much, but adds up to 292% a year.

Balancing the system

So that’s the problem. Are there any ways to make credit more equitable?

Given the power structures of capitalism and the fact that private lending is based on quite ruthless risk assessment by banks, the only way to address this would be some sort of state-subsidised funding.

This does happen around the world and has been done in New Zealand.

Post-World War II, the Government gave cheap mortgages to returned servicemen.

Until the 1980s, there was also a line of cheap subsidised consumer credit for public service workers via the PSIS.

That eventually went into statutory management in 1987 and then evolved into the Co-operative Bank.

There have also been more radical proposals to overhaul the entire credit system. New Zealand’s Social Credit Party got about 20% of the vote in 1981.

Its key policy was based on the belief that the way banks use debt to create money, control credit and charge interest is inherently unfair.

The party argued that the Government should issue “social credit” – money distributed directly to citizens without the interest burden attached to bank-created money.

There are still variations of that theory out here. Modern Monetary Theorists are a passionate bunch who advocate this sort of structural change.

I think it falls down for a couple of reasons.

These days, New Zealand is locked into a global financial system and is reliant on foreign capital to keep the economy running. A really radical departure from orthodoxy would cop the wrath of the rating agencies and, ironically, blow up the interest we’d have to pay on our national debt.

Also, there are inflationary risks.

If the credit issued by a government is all invested carefully into assets that will appreciate in value or economic productivity, then – maybe – it might turn out great.

But people have a bad habit of not spending money (even borrowed money) wisely.

They invest in things that go bust or they spend it on stuff that has no long-term value.

There is a risk that extra credit might just inflate asset prices and end up costing us in the long run.

That sort of happened in 2021, when the Reserve Bank held interest rates very low and it caused a housing bubble.

Historically, New Zealand has seen the inequality gap widen since the 1990s, with a strong correlation to the lift-off in house prices.

I’ve also noticed that the rise in house prices in the 1990s correlates closely to the era of foreign bank ownership.

The big foreign banks made it much easier for New Zealanders to get a mortgage and while many Kiwis were able to use property to boost their wealth, we also boosted house prices.

Now, new generations are taking on crippling mortgages just to get on the property ladder.

Perhaps the Government could control access to cheap credit more precisely? Although I’m a sceptic when it comes to the efficiency of governments.

So the slightly depressing answer to your question, from my point of view, is that it looks hard to address inequality through credit mechanisms.

That said, I’m not averse to the idea of targeted state support to help people get into a home and grow their wealth.

When you consider how much we have to spend on welfare payments, and particularly on accommodation supplements that go to landlords, it probably makes sense in the long run.

I’m just not sure how it would work in practice, without blowing back on us by inflating asset prices.

Ideas on the back of an envelope please ...

Last week’s column sparked a lot of reaction.

In short, I had a letter from a concerned mother whose well-qualified son was struggling to find work.

She wanted to know if he should keep trying or head to Australia.

Sadly, my honest response was to suggest he try his luck across the Tasman.

That was based on the grim prognosis for unemployment – and particularly youth unemployment – for the next several months.

Here are a couple of interesting responses from readers:

Brits heading for Aussie

Hi Liam,

Your story about young Kiwis struggling to find work and being advised to head to Aussie rang alarm bells. Not just because of what it means for NZ’s future but because I have personal experience of what’s happening to young people in the UK.

I have family over there and university graduates can’t get work just like here. It’s mainly being blamed over here on AI taking graduate entry jobs. I wonder how much of that might be happening here as well?

Guess where the young Brits are being told to go for jobs?

Australia! I hope the lucky country stays lucky for NZ’s kids’ sake as well as the UK’s!

Alastair McKenzie

Rude AI

I was very sad to read the letter about the young man who hasn’t been able to get a job interview, despite having a degree, work experience and a “good CV” and feels he must go overseas to get a job. Is it possible that he and his parents are unaware of the modern practice of using AI screening tools called Applicant Tracking Systems, which don’t just scan your text; they actively score and rank your CV based on formatting, keyword relevance and contextual impact.

They (and your readers) might find it helpful to watch this [YouTube] breakdown of how modern AI recruitment software scores an application and what to do in order to avoid instant disqualification.

That it is possible to create such a tool begs the question of how hard it can be to build into the programme a polite email to applicants who have been screened out? Basic good manners, I’d have thought.

Caroline Locke

Thanks Caroline,

I agree. If artificial intelligence (AI) is smart enough to quickly assess a candidate, then it ought to respond and let them know why they missed out.

And it ought to do that with some sensitivity and courtesy.

Don’t forget to check out the Herald’s new podcast, The Economy of Everything, with Liam Dann and Tamsyn Parker – thanks to CMC Markets.

Liam Dann is business editor-at-large for the New Zealand Herald. He is a senior writer and columnist, and also presents and produces videos and podcasts.

He joined the Herald in 2003. To sign up to his weekly newsletter, click on your user profile at nzherald.co.nz and select “My newsletters”.

For a step-by-step guide, click here. If you have a burning question about the quirks or intricacies of economics send it to liam.dann@nzherald.co.nz or leave a message in the comments section.