The government, which has lagged in recent political polls, has blamed global events for the downturn
[WELLINGTON] New Zealand’s economy shrank much more than economists forecast in the second quarter, fuelling bets that the central bank may need to cut interest rates more aggressively than it currently projects.
Gross domestic product slumped 0.9 per cent in the three months to June following a revised 0.9 per cent expansion in the first quarter, Statistics New Zealand said on Thursday (Sep 18) in Wellington. Economists expected a 0.3 per cent contraction.
The New Zealand dollar fell, buying 59.25 US cents at 12.30 pm in Wellington from 59.64 US cents beforehand. The yield on policy sensitive two-year notes slid 10 basis points to 2.81 per cent as traders lifted expectations of more Reserve Bank of New Zealand (RBNZ) easing.
The economy, which suffered a sharp recession last year, has been slow to respond to the RBNZ’s aggressive rate cuts and remains smaller than it was at the start of 2024. The RBNZ last month forecast it will cut the Official Cash Rate (OCR) to 2.5 per cent from 3 per cent over its two remaining meetings this year.
“The sharp decline in output last quarter puts a bumper 50 basis-point cut in play for the RBNZ at its October meeting,” said Abhijit Surya, senior Asia-Pacific economist at Capital Economics in Singapore. “Risks to our forecast for a terminal rate of 2.5 per cent are also tilted to the downside.”
Economists at Westpac said that they now expect a 50-point cut next month and a 25-point move in November, citing today’s data.
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Government under pressure
The economy’s failure to revive is heaping pressure on Prime Minister Christopher Luxon, who has made growth a key priority ahead of a 2026 election. The government, which has lagged in recent political polls, has blamed global events for the downturn.
The economy “had the stuffing knocked out of it” by international turmoil and uncertainty relating to US tariffs, Finance Minister Nicola Willis said today. “All forecasters are expecting economic growth to strengthen from now on.”
Today’s report showed the economy grew 1.3 per cent in the six months to March, but activity stuttered in the second quarter as concerns about global demand curbed business investment and hiring.
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Unemployment rose to a five-year high of 5.2 per cent which, together with dwindling immigration and cost-of-living pressures, damped consumer spending.
The RBNZ, which expected a 0.3 per cent contraction in the quarter, has cut the OCR by 250 basis points since August last year but that has yet to produce a significant revival in activity, in part because many households on fixed-term home loans have not received the benefit of falling interest rates.
RBNZ governor Christian Hawkesby last week said that policymakers had been surprised by the “confidence shock” in the second quarter but leading indicators for July gave him optimism that growth will return in the second half.
While indicators of household spending for July were positive, more recent reports show both the manufacturing and services industries contracted in August. Consumer confidence also remains subdued, according to a third-quarter survey published yesterday.
The second-quarter contraction was led by depressed building and factory output, today’s report showed. Construction fell 1.8 per cent in the quarter while manufacturing declined 3.5 per cent. Exports and investment also retreated while household spending increased 0.4 per cent – sharply slower than the 1.4 per cent growth seen in the first quarter.
GDP per capita fell 1.1 per cent from the first quarter.
From a year earlier, GDP declined 0.6 per cent, worse than economists’ estimate of nil growth. BLOOMBERG
