New Zealand’s Soft GDP Fuels Rate-Cut Bets and Bond Rally

(Bloomberg) — New Zealand’s economy shrank much more than economists forecast in the second quarter, fueling bets that the central bank may need to cut interest rates more aggressively than it currently projects.

Gross domestic product slumped 0.9% in the three months through June following a revised 0.9% expansion in the first quarter, Statistics New Zealand said Thursday in Wellington. Economists expected a 0.3% contraction.

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The New Zealand dollar fell, buying 59.25 US cents at 12:30 p.m. in Wellington from 59.64 cents beforehand. The yield on policy sensitive two-year notes slid 10 basis points to 2.81% as traders lifted expectations of more RBNZ easing.

The economy, which suffered a sharp recession last year, has been slow to respond to the Reserve Bank’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 to 2.5% from 3% 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% are also tilted to the downside.”

Economists at Westpac said they now expect a 50-point cut next month and a 25-point move in November, citing today’s data.

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% in the six months through March, but activity stuttered in the second quarter as concerns about global demand curbed business investment and hiring.

Unemployment rose to a five-year high of 5.2% which, together with dwindling immigration and cost-of-living pressures, damped consumer spending.

The RBNZ, which expected a 0.3% 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 haven’t received the benefit of falling interest rates.