New Zealand’s Economic Contraction

By Lucy Craymer

WELLINGTON (Reuters) – New Zealand’s economy contracted in the second quarter as activity fell in several major industries, keeping the central bank on track for more rate cuts this year.

Official data released on Thursday showed that the gross domestic product (GDP) fell by 0.2% in the June quarter compared to the previous quarter, which was better than analysts’ forecasts of a 0.4% contraction.

This was following a revised down 0.1% rise in the first quarter, which was previously estimated at 0.2% growth.

Annual GDP decreased by 0.5%, in line with market expectations according to Statistics New Zealand.

The New Zealand dollar remained almost unchanged at $0.6213 post-release, as the data was deemed too outdated to alter the outlook for interest rates.

Markets are fully priced for another quarter-point interest rate cut in October, with a 28% chance for a 50 basis points cut. Swaps have incorporated 84 basis points of easing by the end of the year.

ASB Bank’s senior economist, Kim Mundy, noted in a report that the data highlights a weak second-quarter economy, with indications of soft private demand affecting multiple sectors. Activity declined in nine out of sixteen industries, particularly in retail, accommodation, agriculture, forestry, fishing, and wholesale trade sectors; manufacturing showed the most improvement.

Mundy indicated that the data did not significantly shift the outlook for the Reserve Bank of New Zealand (RBNZ). ASB Bank anticipates that the central bank will cut rates by another 50 basis points by year’s end.

The central bank lowered the official cash rate for the first time in over four years in August, with RBNZ Governor Adrian Orr aiming for two more cuts by Christmas, aligning with trends from other major central banks.

On Wednesday, the U.S. central bank began a forecasted series of interest rate cuts with a larger-than-anticipated half-percentage-point reduction. The European Central Bank and Bank of Canada have also lowered rates.

Westpac’s senior economist Michael Gordon mentioned that financial markets may believe the Federal Reserve’s decision opens doors for larger cuts, including in New Zealand. However, he noted that current local data does not strongly support an increase in RBNZ’s easing pace beyond its previous August policy signals.