New Zealand's GDP unexpectedly fell by 0.9%, and market interest rate cut expectations surged rapidly

According to Zhitong Finance APP, New Zealand's economy shrank far more than economists expected in the second quarter, leading to increasing speculation that the country's central bank may need to cut interest rates more aggressively than currently anticipated.

Data released by Statistics New Zealand on Thursday showed that the gross domestic product (GDP) fell by 0.9% in the three months ending in June, revised from a growth of 0.9% in the first quarter. Economists had previously expected a contraction of 0.3%.

As a result, the New Zealand dollar's exchange rate declined. At the same time, due to traders' rising expectations for further easing by the Reserve Bank of New Zealand, the yield on two-year government bonds, which are sensitive to policy changes, fell.

New Zealand's economy experienced a severe recession last year and has been slow to respond to the Reserve Bank of New Zealand's aggressive rate cuts, with the current economic size still smaller than at the beginning of 2024. The Reserve Bank of New Zealand had predicted last month that it would lower the official cash rate (OCR) from 3% to 2.5% in the remaining two monetary policy meetings this year.

"The significant decline in economic output last quarter suggests that the Reserve Bank of New Zealand may announce a substantial 50 basis point rate cut at the October meeting," said Abhijit Surya, senior economist for Asia-Pacific at Capital Economics in Singapore. "There is also a risk that our forecasted terminal rate of 2.5% could be further lowered."

Economists at Westpac also stated that based on today's data, they currently expect the Reserve Bank of New Zealand to cut rates by 50 basis points in October and by another 25 basis points in November.

Government Under Pressure

New Zealand's sluggish economic recovery has put immense pressure on Prime Minister Christopher Luxon. Luxon has made driving economic growth a core priority ahead of the 2026 election. Currently, the government is trailing in recent polls and attributes the economic downturn to global events.

New Zealand's Finance Minister Nicola Willis stated today that the country's economy has been "severely impacted" by international turmoil and uncertainties related to U.S. tariffs. She also pointed out, "All forecasting agencies expect economic growth to accelerate from now on."

The report indicated that New Zealand's economy grew by 1.3% in the six months ending in March; however, entering the second quarter, concerns over global demand have suppressed business investment and hiring activities, leading to an economic standstill.

New Zealand's unemployment rate has risen to 5.2%, the highest in five years; coupled with a continuous decrease in immigration and increasing cost-of-living pressures, consumer spending has been significantly restrained.

The Reserve Bank of New Zealand had previously expected the GDP to contract by 0.3% in the second quarter. Since August of last year, the central bank has cumulatively cut the official cash rate by 250 basis points, but this has not yet led to a significant recovery in economic activity. Part of the reason is that many households with fixed-rate mortgages have not yet benefited from the rate cuts Christian Hawkesby of the Reserve Bank of New Zealand stated last week that policymakers were surprised by the "confidence shock" that occurred in the second quarter, but the leading indicators from July give him reason to be optimistic that the economy will recover in the second half of this year.

Although the household spending-related indicators in July showed positive trends, more recent reports indicate that New Zealand's manufacturing and services sectors both contracted in August. Additionally, the third-quarter survey released yesterday showed that consumer confidence remains low.

The report also pointed out that weak construction and factory output were the main reasons for the economic contraction in the second quarter. During that quarter, construction output fell by 1.8%, and manufacturing output declined by 3.5%; exports and investment also saw a decline, while household spending grew by only 0.4%, far below the 1.4% increase in the first quarter.

Compared to the first quarter, New Zealand's GDP per capita decreased by 1.1%. Year-on-year, GDP fell by 0.6%, worse than economists' expectations of zero growth