New Zealand’s economy contracted in the second quarter as activity in a number of major industries fell, keeping the central bank on track for further rate cuts this year.
Official data released on Thursday showed gross domestic product shrank 0.2% in the June quarter from the previous quarter, better than analysts had expected a 0.4% contraction.
The decline follows a 0.1% increase in the first quarter, which was revised down from a previous estimate of 0.2%.
Annual GDP fell by 0.5%, according to data from Statistics New Zealand, in line with market expectations.
The New Zealand dollar was virtually unchanged at $0.6213 after the data was released, which was seen as too old to affect the rate outlook.
Markets are pricing in another quarter-point cut in October, with a 28% chance of reaching 50 basis points. Swaps are pricing in an 84 basis point easing by year-end.
“Today’s data underscores that the economy was indeed in a bad way in the second quarter, with widespread evidence that private demand is weak and that this is spilling over into many sectors of the economy,” ASB Bank senior economist Kim Mundy said in a note.
The data show activity declined in nine of the sixteen industries, with retail and accommodation, agriculture, forestry and fishing, and wholesale trade all weaker. Manufacturing saw the biggest improvement.
Mundy said the data did not materially change the picture for the Reserve Bank of New Zealand and ASB Bank continued to expect the central bank to cut rates by a further 50 basis points by the end of the year.
The central bank cut the official bank rate for the first time in more than four years at its last meeting in August, and RBNZ Governor Adrian Orr has said he would like to make two further cuts by Christmas.
The move follows a trend of other major central banks that have begun cutting interest rates. On Wednesday, the U.S. central bank kicked off a series of expected interest rate cuts, making a half-percentage-point cut that was deeper than usual. The European Central Bank and the Bank of Canada also cut rates.
Michael Gordon, senior economist at Westpac, said financial markets were likely to focus on the idea that the Fed’s decision paved the way for 50 basis point rate cuts in other countries, including New Zealand.
But “there is little in the local data to support the RBNZ accelerating the pace of easing beyond what it has already signalled in its August policy statement,” he said.
