The index, a monthly survey of service sector activity, showed a fall in the south from 44.8 in April to 37 in May, well below the national figure for May of 46.2, which was 2.5 points higher than April's figure.
A reading above 50 indicates services activity was expanding and below 50 that it was contracting, and this was the 14th consecutive month the index recorded a contraction.
However, in a statement, BNZ Capital said the level of contraction was relatively stable and the national index had not fallen below 40.
Activity in May was negative in all four of the country's regions, but half improved from April, with Otago-Southland the only sector to report a decline.
But it was the first time since October last year the Otago-Southland index had slipped below 40.
Otago-Southland Employers Association chief executive John Scandrett said the national result was evidence service sector activity remained "in the shadows".
The index measured sales, employment, new orders, inventories and deliveries and Mr Scandrett said all those indices showed contraction in May.
Nationally, virtually all the service sectors that contribute to the index recorded negative results for May, with the hardest hit being transport and storage at 41.4, accommodation, cafes and restaurants at 42.9 and retail trade at 43.5.
Wholesale trade (47.7) and property and business services (54.6) lifted from April.
Nationally, the index for the first five months of this year showed a reading of 45.2, which Mr Scandrett said reflected a stronger performance over the same period than Australia and, until recently, Europe.
The level of the PSI in the northern region rose from 42.8 in April to 47.4, its highest value since October last year, the central region was at 47.2, slipping from 48.8, while Canterbury-West Coast rose from 43.1 in April to 43.7 but still recorded its second ever lowest result.
Mr Scandrett said his association was trying to generate wider participation among Otago-Southland members in the PSI and performance of manufacturing indices, saying he was concerned the data might not always accurately reflect the true picture.
