New Zealand's GDP unexpectedly plunged by 0.9%, leading to a rapid increase in market expectations for interest rate cuts.

In the second quarter of New Zealand, the economic contraction exceeded economists' expectations by a large margin, leading many to believe that the country's central bank may need to cut interest rates in a more aggressive manner than initially anticipated. Data released by Statistics New Zealand on Thursday showed that the country's Gross Domestic Product (GDP) declined by 0.9% in the three months leading up to June, revised down from an initial estimate of 0.9% growth in the first quarter. Economists had previously expected a contraction of 0.3%. As a result of this, the New Zealand dollar depreciated. Additionally, due to traders anticipating further easing measures from the Reserve Bank of New Zealand, the two-year government bond yields, which are sensitive to policy changes, decreased. The New Zealand economy experienced a severe recession last year, and the response to the Reserve Bank of New Zealand's aggressive interest rate cuts was slow. Currently, the economy is still smaller than its size at the beginning of 2024. The Reserve Bank of New Zealand had previously forecasted cutting the official cash rate (OCR) from 3% to 2.5% in the remaining two monetary policy meetings of the year. "With the significant drop in economic output in the last quarter, it is possible that the Reserve Bank of New Zealand may announce a 50 basis point rate cut at the October meeting," said Abhijit Surya, Senior Economist for Asia-Pacific at Capital Economics in Singapore. "There is a risk of further downward movement from our forecasted 2.5% terminal rate." Economists at Westpac Bank also stated that based on the data released today, they are currently expecting the Reserve Bank of New Zealand to cut rates by 50 basis points in October and further cut by 25 basis points in November. Government faces pressure The slow recovery of the New Zealand economy has put significant pressure on Prime Minister Christopher Luxon. Luxon has made promoting economic growth a core priority before the 2026 general election. Currently, the government is lagging behind in recent polls, with the economic downturn being attributed to global events. New Zealand Finance Minister Nicola Willis stated today that the country's economy has been greatly affected by international turmoil and uncertainties related to U.S. tariffs, resulting in a significant blow. She also mentioned, "All forecasters anticipate that economic growth will accelerate from now on." Reports show that the New Zealand economy grew by 1.3% in the six months leading up to March, but economic activity stagnated in the second quarter due to concerns about global demand constraining business investment and hiring. The unemployment rate in New Zealand has risen to 5.2%, reaching a five-year high. Along with a continuous decrease in immigration numbers and increasing cost of living pressures, consumer spending has been noticeably restrained. The Reserve Bank of New Zealand had previously anticipated a 0.3% contraction in GDP for the second quarter. Since August last year, the central bank has lowered the official cash rate by 250 basis points, but has not yet seen significant economic activity recovery. One reason is that many households with fixed-rate mortgages have not benefited from the rate cuts. Reserve Bank of New Zealand Governor Christian Hawkesby expressed surprise last week at the "confidence shock" in the second quarter, but the leading indicators for July give him reason to be optimistic that the economy will recover growth in the second half of the year. Although household spending indicators for July showed positive signs, recent reports indicate that both the manufacturing and service sectors in New Zealand contracted in August. Furthermore, the consumer confidence remains low according to the latest survey data released yesterday. The report also noted that weak output from the construction and factory sectors was the main reason for the economic contraction in the second quarter. During this quarter, construction output declined by 1.8% and manufacturing output fell by 3.5%; exports and investments also fell, while household spending only grew by 0.4%, much lower than the 1.4% growth in the first quarter. Per capita GDP in New Zealand fell by 1.1% compared to the first quarter. Year-on-year, GDP declined by 0.6%, falling short of economists' forecast of zero growth.