New Zealand economy seen contracting, justifying more rate cuts

[WELLINGTON] New Zealand’s economy probably contracted in the second quarter as spending and investment dried up, justifying the Reserve Bank of New Zealand’s (RBNZ) projections of further interest-rate cuts.

Gross domestic product declined 0.3 per cent in the three months to June, according to the median forecast of 18 economists surveyed by Bloomberg. The data, due Thursday (Sep 18) in Wellington, is also expected to show GDP was unchanged from the year-earlier quarter.

The economy has been slow to respond to the RBNZ’s 250 basis points of rate cuts since August last year because many borrowers on fixed-term home loans are yet to get the full benefit. The central bank forecasts the Official Cash Rate will drop to 2.5 per cent by the end of the year from 3 per cent currently as subdued activity begins to curb inflation pressures.

“A cash rate below 3 per cent puts stimulus on the table,” said Jarrod Kerr, chief economist at Kiwibank in Auckland. “Low interest rates should reignite economic activity. With that, the outlook is much brighter.”

Prime Minister Christopher Luxon, who has made growth a key priority ahead of a 2026 election, has come under pressure as leading indicators suggest the initial recovery from last year’s recession has faltered.

The economy grew 1.3 per cent in the six months to March, buoyed by farm production and export growth, but activity stuttered in the second quarter as US tariff policies fuelled uncertainty about global demand. Manufacturing and construction are expected to have slowed sharply.

The resulting mood swing among businesses curtailed investment and hiring. Rising unemployment and dwindling immigration then combined to damp consumer spending and the housing market.

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.

The central bank expects a 0.3 per cent contraction in the second quarter, but projects a 1.1 per cent expansion in the six months to December.

SEE ALSO

New Zealand home prices dip in August, buyers remain cautious

New Zealand’s weak services hint at slower economic rebound

New Zealand’s consumer spending drop hints at shrinking economy

Why New Zealand is relaxing its property rules for rich foreigners

New Zealand house prices drop to two-year low in weak economy

More

While indicators of household spending for July have been positive, more recent reports show both the manufacturing and services industries contracted in August.

“The levels are inconsistent with our expectation that the economy bounces through the latter part of this year and into the next,” said Stephen Toplis, head of research at Bank of New Zealand in Wellington, which produces the reports. “We still believe the combination of easing monetary policy and strong commodity prices will produce an economic recovery, but it might take a bit longer than we are currently expecting.” BLOOMBERG