By Lucy Craymer
WELLINGTON (Reuters) – New Zealand’s economy shrank more than expected in the second quarter as construction remained in decline and global uncertainty weighed, increasing expectations of a steeper rate cut in October.
Official data out on Thursday showed gross domestic product (GDP) fell 0.9% in the second quarter from the prior quarter, worse than analysts’ and the Reserve Bank of New Zealand’s forecasts of a 0.3% fall.
New Zealand’s economy has contracted in three of the last five quarters.
Annual GDP decreased 0.6%, Statistics New Zealand data showed. The market had expected it to remain unchanged.
Following the weaker-than-expected data, two-year swap rates slid 10 basis points to 2.7290%, their lowest since early 2022. The kiwi dollar fell 0.5% to $0.5932, well off an overnight peak of $0.6007.
The market is now pricing in a further 58 basis points of cuts to the official cash rate (OCR), up from 48 basis points before the GDP data was released and a 20% chance that the central bank will cut by 50 basis points in October.
“The weaker than expected GDP outcome will no doubt encourage the RBNZ in its intentions to cut the OCR further this year,” Westpac senior economist Michael Gordon said in a note.
He added that the main points of weakness were in the construction sector, manufacturing output and professional services.
New Zealand sank into a technical recession in the September quarter of last year, and its economy grew slowly in the fourth quarter of 2024 and the first quarter of 2025.
In August, the central bank flagged two more rate cuts this year as it flagged spending by households and businesses has been constrained by uncertainty, falling employment, higher prices for some essentials and declining house prices.
(Reporting by Lucy Craymer; Editing by Jamie Freed)
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