The BNZ-Business New Zealand performance of services index recorded a reading of 37.7 for the region in October, slightly up from the 37 reading in September but well down on the 55.3 recorded in October last year.
A reading of below 50 indicates a contraction in the sector and above 50 is an expansion.
"There are signs of some lifts in pre-Christmas activity," Otago-Southland Employers Association chief executive Duncan Simpson said.
Negative comments on current business conditions dropped to 56% of the sample, down from 80% in September.
However, many participants were clearly apprehensive about prospects for 2009.
The local hospitality industry seemed to be having a tough time, even though in Dunedin several new projects were about to add further competition in the sector, he said.
A recent Mastercard survey indicated that the ability to dine and drink out remained the biggest discretionary spending priority for New Zealanders.
That did not appear to be playing out locally, based on recent survey results, Mr Simpson said.
Nationally, the index rose slightly to 48.7% but that marked the seventh consecutive month the service sector industry had been in contraction.
Bank of New Zealand economist Stephen Toplis said things were tough and few businesses were escaping the fact that the economy was now in the middle of what he believed to be the fourth quarter of the current recession.
"Moreover, there is more pain to come yet with the next leg of the downturn likely led by a sharp contraction in investment activity and a significant increase in the unemployment rate.
"While this is far from an inspiring environment, the good news is that the economy's automatic stabilisers are swinging into action.
These will not only provide some short-term relief but will also start the wheels turning . . . [toward] an end to this downturn."
Foremost among the adjustments that must happen when the economy slowed was the death of inflation.
In that regard, the latest cycle looked to be no different from all the others.
As domestic demand softened, spare capacity in the economy began to appear and inflationary pressures fell.
The demise of demand globally and the ensuing drop in commodity prices were the biggest contributors to lower inflation, he said.
Global growth forecasts were being slashed by the day and it now looked as though the global environment was much worse than that experienced in 1991-92 and more in line with what was seen in 1982.
Consistent with that, commodity prices of all types were in freefall.
Most notable had been the drop in oil prices which had been reflected in New Zealand petrol pump prices.
Inflation, which peaked at 5.1% in September was likely to be 1.2% by this time next year.
"Accordingly, the Reserve Bank has been given the green light to lower its cash rate aggressively. It's already gone from 8.25% to 6.5% and we see it dropping another 2% over the next few months. This, in turn, is resulting in a sharp drop in the exchange rate - with more to come."
Those developments would ultimately set the scene for an economic rebound, particularly when the effects were compounded by substantial easing in fiscal policy.
Even as things stood, most of the events now happening should come as an immediate welcome relief to businesses, Mr Toplis said.
