In May 2025, New Zealand’s Services Performance Index (PSI) dropped to 44.0. This is the lowest level since June 2024, down from 48.1, and below the long-term average of 53.0. This decline follows a significant drop in the Performance of Manufacturing Index (PMI), which fell from 53.3 to 47.5. Both indices indicate that the economy may be heading toward a recession. Despite these concerning numbers, the NZD/USD currency pair remained stable after the data was released.

New Zealand Economy Contraction

The latest figures show a broader slowdown in both manufacturing and services in New Zealand. A PSI of 44.0 indicates that most service sector firms are experiencing contraction rather than growth. While a drop from 48.1 might not seem alarming, the gap from the long-term average of 53.0 shows ongoing weakness rather than just a temporary downturn. The manufacturing data reinforces this trend. The sharp decline from 53.3 to 47.5 brings the index below the crucial threshold of 50, which separates growth from shrinkage. When combined with service sector data, it points to broader economic challenges rather than temporary industry cycles. What’s surprising is the market’s response, or rather, the lack of it. Normally, such data would cause currency fluctuations, but the New Zealand dollar remained steady. This could mean traders had expected these results or had already positioned themselves for a downturn. It may also suggest that current market focus is elsewhere, possibly on central bank policies or international events shaping short-term sentiment.

Forecasting Economic Trends

Looking ahead, we observe that both the manufacturing and services sectors have shown consecutive weaknesses. Historically, this kind of dual-sector contraction often precedes a decline in GDP, typically leading to a technical recession if it continues for another quarter. As a result, we anticipate revisions downwards for domestic growth forecasts in the near future. Market expectations regarding policy rates may also become more responsive to future guidance. Thus, following commentary is crucial—not just decisions on rates but also insights about the future. Yield curves might start to show a higher chance of monetary easing, and this could be reflected in short-term interest rate derivatives. Given that central banks usually react with a delay to worsening economic data, there’s room for speculation about the timing of their actions. While the services index does not eliminate uncertainty in the short term, it makes earlier expectations for rate hikes harder to defend. If confidence remains low, we could see increased volatility in front-end contracts and a rise in demand for hedging. Overall, it’s essential to view the latest data as more than just one-month snapshots. Their trends, magnitude, and connection to long-term averages all suggest worsening conditions. We may see more noticeable risk adjustments on the rates side compared to currencies, assuming no unexpected developments arise. If this pattern continues, larger investments in interest rate options, especially those that protect against potential near-term policy changes, might occur. Our strategy focuses on how these figures influence the forward curve rather than just the current values. Trading strategies may lean towards capturing the changes caused by rising uncertainty, particularly within the 3- to 9-month timeframe. The market may already be considering this approach. Create your live VT Markets account and start trading now.

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